Dollar `sinking into the sunset'. Nations' plug for stability has little effect
Less than a week after the Group of Seven called for stable exchange rates, the dollar is getting hammered. Although central banks aggressively bought dollars to brake the fall, the greenback dropped sharply yesterday. The dollar fell to 122.85 yen compared with 126 yen last Thursday and the dollar was 1.591 marks compared with 1.625 before Christmas. White House spokesman Marlin Fitzwater said yesterday that the administration wants to see stability in the dollar and that further decline would be counterproductive.
``The dollar is sinking into the sunset,'' says Elizabeth Reiners, a vice-president at Dean Witter Reynolds Inc.
Following the dollar decline, the stock market yesterday was falling. By mid-afternoon, the Dow Jones industrial average was off 60 points. Interest rates rose quickly as bond markets fell. There was speculation the Federal Reserve Board was raising rates as it purchased dollars.
This is not the way it was supposed to happen. Only last Monday the Group of Seven (G-7), made up of the US, Britain, France, West Germany, Italy, Canada, and Japan, issued a statement that said the dollar had fallen enough. The communiqu'e came after Congress passed the budget. However, the G-7 committed themselves to no new policy actions to support the dollar. This prompted skepticism among currency traders.
Thus, the pressure on the dollar was not unexpected. But many traders and analysts did not expect it to fall so fast after the G-7 statement. Henry Kaufman, an economist at Salomon Brothers, predicted the markets would shift their focus to economic news in January. He forecast that US unemployment statistics and trade data, to be released in early January, would provide ``the first test of whether existing policies can remain unchanged for long.''
Barry Bosworth, a senior fellow at the Brookings Institution in Washington, says one of the pressures on the US is to issue debt in foreign currencies.
``It's tempting to the government,'' Mr. Bosworth says, ``since you borrow at lower interest rates, which helps make the deficit go down.'' The problem arises in paying back the debt. If the dollar drops further, the US - after converting dollars into foreign currencies - would have to pay back more than it borrowed. ``There are tremendous capital losses to future generations,'' says Bosworth.
Indicators to watch in '88
Every month the government releases about 41 economic indicators. Reams more of statistics are put together by trade associations and private economists. Here is a guide to some key ones to watch to gauge 1988's performance:
Auto sales. Next year Americans are expected to buy about 9.75 million autos compared with 10.5 million for the 1987 model year. Despite the expected decline, Detroit sees light-truck sales remaining at a torrid 4.75 million pace. Frequent advertising means such sales are on track. (Car glut in US, Page 12.)
Differences in interest rates. Bond traders watch 10-year government bonds, comparing West German, Japanese, and US interest rates. For the last half of this year, US bonds have yielded 2.50 more percentage points than German bonds and 4 percentage points than Japanese bonds. ``As the spread widens, it's bullish for the dollar,'' explains Mitchell Held, chief financial economist for Smith Barney, Harris Upham & Co.
Trade. Some economists believe a drop in imports will signal the start of a recession. Still, others believe the numbers will improve, especially as the price of oil falls. Every $1 fall in price translates into a $3 billion improvement in the trade deficit. ``If you see the monthly trade [deficit] falling to the $12 billion range, you can feel confident the real volume of trade is turning around,'' says Georges Rocourt, chief economist for Mercantile-Safe Deposit & Trust Co.
West Texas intermediate crude. US inflation will likely be better than expected because of falling oil prices. Salomon Brothers economist Henry Kaufman estimates gasoline prices could drop as much as 8-9 cents a gallon, paring 0.2 percent a month off the Consumer Price Index for a few months. The price of West Texas Intermediate is currently about $15.60 per barrel.
Airline traffic. Business professionals travel by air to make sales calls. Salesmanship keeps factories busy. So, how do you measure if business people are flying? Goldman Sachs looks at Industrial Production released by the Federal Reserve Board each month. In a chicken and egg situation, people in business seem to fly when industrial production is strong. It indicates they have the profits to generate new sales.
Currency in circulation. Every Friday the Wall Street Journal prints Federal Reserve data, including this item which tells how much cash is in public hands. As any merchant will agree, ``cash talks.'' Thus, Brian Fabbri, a former Federal Reserve Board economist, looks at this number to infer consumer spending. This must be done on a historical basis. So start charting the material now - if it goes up, it indicates more spending and a stronger economy.