Dollar Skids Lower in World Markets against Yen, MarkBy James Gerstenzang and Jonathan Peterson
Los Angeles Times
Under pressure from the shattered Mexican economy and the deep, chronic trade deficit with Japan, the battered dollar fell to new lows Monday in major currency markets around the world, raising doubts about the course of the U.S. economy.
The weekend break in trading did little to calm the roiled international currency business, as the dollar skidded to its lowest value against the Japanese yen in the post-World War II era. It also slumped against the powerful German mark, the French franc and other currencies.
"This is not a little blip; this is a long-term trend," said Lawrence Chimerine of the Economic Strategy Institute in Washington.
The currency turmoil raises the prospect, however remote, that the Federal Reserve could turn once again to higher interest rates, in order to make the dollar a more profitable haven for foreign investors.
The weaker dollar also would make it more costly for the United States to come to the financial aid of other countries. And it lessens the already limited political appeal of bailing out troubled, emerging economies such as Mexico.
Yet for all the potentially damaging fallout from the current episode, analysts Monday said the economy itself appeared to be in good shape. Dollar speculators seemed more fretful over developments - such as the Mexican rescue plan and the defeat of the balanced budget amendment - than over the fate of the recovery.
While the beleaguered dollar has not suffered from any single knock-out punch, it has been wounded by many cuts in recent days.
The dollar closed in New York Monday at 92.80 yen to the dollar, down from 94.05 Friday. It was valued at 1.4048 German marks, the lowest rate in two years, and 4.9775 French francs. The British pound was quoted at $1.6335, up from $1.6295 on Friday.
Economists predicted that the slide would continue, with Chimerine forecasting a fall perhaps below the rate of 90 yen.
But the dollar's decline against more glamorous currencies Monday was balanced by its increasing value against the Mexican peso and the Canadian dollar. Combined, those two currencies account for roughly one-third of U.S. foreign trade, thus limiting the immediate impact the dollar's weakness in Europe and Japan will have on individuals in this country.
At its broadest, the dollar's difficulties "remind us of the interdependence of the United States with other economies," said international economist C. Fred Bergsten, a senior Treasury official during the Carter administration who now directs the Institute for International Economics, a Washington policy research organization.
"The Mexican meltdown is drawing down U.S. financial reserves, and it threatens to worsen our trade balance," said Robert Hormats, a vice chairman of the Wall Street investment firm of Goldman, Sachs International.
In one irony, U.S. interest rates are having an entirely different impact on currency fluctuations than on securities markets, which have responded positively to the outlook for rates.
Interest rates are expected to stabilize or even drop in the coming months, but that has prompted many currency traders to unload the U.S. dollar. Currency speculators now look to the recovering economy of Germany, where interest rates could go up this year, for a bigger return on their investment than the United States.
Fed Chairman Alan Greenspan reinforced the fears of currency traders, even as he pleased other investors, when he hinted in recent congressional testimony that interest rate policy was on hold for the immediate future.
Given that the outlook for the national economy is sanguine, analysts cited other reasons for the dollar's stormy times, including U.S. foreign policy.
Carol A. Stone, a senior economist at Nomura Securities International in New York, pointed to anxieties about Mexico and the defeat of the balanced budget amendment in Congress, as likely triggers for the dollar's woes.
"It's somewhat dismaying that these other issues are negating the advantages of the attractive domestic economy," she said.