Share this story
Close X
Switch to Desktop Site

Drops in financial markets signal need to shrink US deficits. Dollar dive reflects pessimism over Bush's ability to slim trade gap

Trim those deficits - or else. A jittery Wall Street has been sending that message since the presidential election. Now international currency markets have done the same, reacting with skepticism to George Bush's promise to slim the bulging United States trade and budget deficits.

Just two months after a wobbly dollar seemed headed for steady recovery, it has plummeted to its lowest level against major foreign currencies in five months, and its lowest level against the Japanese yen in more than 15 years. Stock prices have continued to fall as well, bringing the past month's overall decline of the Dow Jones industrial average to nearly 150 points.

About these ads

The gyrations of the stock and currency markets come just as the Bush camp begins to formulate the policies it will attempt to carry out in the coming years. Analysts say that is hardly coincidental. They say the fall of the dollar and stock prices reflects the markets' pervasive skepticism of Mr. Bush's ability to shrink the the federal budget deficit and wean the US from borrowed foreign capital without raising taxes.

The dollar's dive is also being attributed to investor pessimism over Washington's ability to reduce its trade deficit.

The government reported this week that the US merchandise trade deficit for September fell to $10.46 billion, 15 percent lower than the previous month's figure. But there were other signs that any further improvement in the deficit would be hard to come by - among them, that import figures declined only slightly, and still remained high, and that US factories operated at their highest capacity in more than eight years, leaving little room for further export growth.

Some economists argue that the dollar ought to fall further still if the trade deficit is to be constrained: A cheap dollar lowers the cost of US goods abroad, helps increase exports, and, ultimately, helps trim the trade deficit. Last week, Harvard economist Martin Feldstein, former chairman of the President's Council of Economic Advisers, called for a 20 percent drop in the dollar.

But a cheap dollar also raises the costs of imports - thus triggering inflation - and also increases the cost of borrowed capital from abroad. ``People get nervous when they hear Feldstein talk and think the Bush administration is going to follow a policy of dollar devaluation,'' says Lawrence Hunter of the US Chamber of Commerce. ``The dollar's falling in reaction to all the scare-mongering going on.''

Market analysts believe the dollar may have been stabilized for the coming weeks. The Federal Reserve intervened yesterday by buying dollars to keep the currency from falling too far - several days after the Bank of Japan reportedly began scooping up dollars in a desperate attempt to prop it up against the yen.

``The markets have been wondering what the floor of the dollar would be, and were letting it fall until they found it,'' says David Hale of Kemper Financial Services in Chicago. ``Now I think we've found it.''

About these ads

But another plunge could be in the offing. In testimony before the National Economic Commission Wednesday, Federal Reserve chairman Alan Greenspan said the US economy would be headed for trouble if Congress and President-elect Bush did not move decisively to cut the budget deficit.

The dollar's value is linked to the budget deficit - in a robust economy, failure to bring down the budget deficit increases imports, thus worsening the trade deficit - and if the deficit doesn't fall, the dollar almost surely will.

But the prospects for deficit reduction are, at best, uncertain. Over the past two years, the US budget deficit has fallen from $220.9 billion for fiscal 1986, to $155.1 billion for fiscal 1988. The Gramm-Rudman deficit reduction law requires that the deficit fall to $136 billion in the current fiscal year and to $100 billion in fiscal 1990.

Follow Stories Like This
Get the Monitor stories you care about delivered to your inbox.