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Dollar Dances out of Governments' Control


WHEN Baron Rothschild was asked, ``What is going to happen to stock prices?'' he is said to have replied, ``They will fluctuate.'' So it is with the floating dollar exchange rate. It is the nature of the beast we call an auction price that the rate will go up and go down. This fact should help me explain why a well-informed observer need not be gravely concerned about the gyrations of the dollar to be expected in the next year and a half.

The whole theory of efficient markets, so beloved by random-walk devotees among modern economists, is that there can be no sure-thing bargains or clear-cut investment duds. The broker who tells you that IBM can't possibly go down is a fool or a cheat: Were it sure to go up, it would already have been bid up there.

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Governments cannot take ``yes'' for an answer. When the International Monetary Fund and the World Bank held their annual autumn meeting in Washington, most government officials agreed that the dollar was appreciating too much relative to the German mark and the Japanese yen.

The Group of Seven (G7) agreed that a further rise in the dollar would be bad for continued improvement in America's trade deficits. More appreciation of the dollar, they feared, would put inflationary pressure on domestic prices in European Community and Pacific Rim nations.

So they agreed to intervene. With blast of trumpet, the various central banks and stabilization funds began intervening to sell dollars.

Financial editors applauded. Professors of economics older than 50 beamed. It was like Kaiser Wilhelm's Germany on that first happy day of World War I when only Albert Einstein was glum.

I have to confess that Paul A. Samuelson was lukewarm toward this excursion into dirty rather than clean exchange-rate floating. My doubts were not philosophical, but rather pragmatic. Exchange markets are so vast as to involve hundreds of billions of dollars a week, whereas all seven of the leading nations together have only about $50 billion to squander on any one quixotic crusade to move the dollar to where some committee of amateurs thinks it ought to be.

The incident is now history. After a small initial success for a few days, dearly bought in terms of G7 capital losses, the dollar continues its own sweet market dance. The Oct. 13, 1989, nose dive of New York stocks by 7 percent did more to bring down the dollar than the interventions did.

Where do we go from here? Different experts give different predictions.

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Rudiger Dornbusch, my distinguished colleague at the Massachusetts Institute of Technology, has predicted an ultimate drop down the road to 87 yen to the dollar. That's a 35 percent depreciation, a whopping one but what he thinks will be needed in the long run to wipe out our red ink on current accounts.

Prof. Ronald McKinnon of Stanford University publishes purchasing power parity indexes that suggest to him a par for the dollar around 180 yen to the dollar - more than twice that projected by Mr. Dornbusch.

Who said economics is an exact science? Harvard's Martin Feldstein, who was former President Reagan's stubborn economic adviser, has guessed 100 yen to the dollar, nearer to Dornbusch than to Mr. McKinnon.

As for myself, I agree that America can't be competitive enough to generate a vast surge in net exports without having the dollar ultimately fall. McKinnon is concentrating on the wrong calculations, in my view. However, I cannot believe in the tacit premise of Dornbusch and Mr. Feldstein that America is on the march toward ceasing to go deep into international indebtedness.

The White House doesn't really care about the two deficits. Neither does Congress. Neither do Main Street voters. We deplore deficits with words, not acts.

This means that the wobble of the dollar over the next 12 to 18 months will be determined by the capital movements that the Japanese, Dutch, British, and Germans choose to make here.

Enthusiasm for United States bonds, stocks, branch plants, and real estate can send the dollar upward.

Psychological pessimism concerning Wall Street returns relative to those in Tokyo, Madrid, Sydney, and Singapore can send the dollar downward.

Cool money, which seeks out the highest risk-corrected return, will move in and out of the dollar depending upon whether the US expansion accelerates, a genuine recession begins in 1990, or a soft-landing growth/recession pattern eventually happens.

Short-term dollar floating is in the hands of the gods who control the caprices of short-term capital movements. G7 interventions can be of only limited effectiveness.

Fundamental domestic goals of prosperity and price moderation are vastly more important than chasing after fetishes of pegged exchange rates.

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