Weak Dollar Reflects Weaker US Economy
Economists say weak US currency has made it easier for Western Europe, Japan to manage higher price of oil
THE United States dollar is a bargain for foreigners. ``The dollar is so cheap, it is not only cheap to buy American goods, it is cheap to buy up America,'' says David Wyss, an economist with DRI/McGraw-Hill in Lexington, Mass.
That was demonstrated Monday when Matsushita Electric Industrial Company paid $6.1 billion in cash for MCA Inc., owner of Universal Studios. It is Japan's largest purchase of a US company. (Buyout signals growing foreign presence in US movie business, Page 8.)
With a dollar worth only about 128 yen, Mr. Wyss figures Matsushita got a bargain even if the dollar should fall further in the short term. ``The Japanese are prepared to take the long view,'' he says.
But Robert Hormats, a vice president of Goldman Sachs & Co., says it is strategic business reasons - not bargains - that prompt overseas companies to buy US firms. Total foreign purchases of US plant and equipment have been declining this year, despite the weaker dollar, he says.
The dollar has been sliding downward on foreign-exchange markets since spring. It has dropped about 20 percent against its high for the year of 160 yen on April 2, and is nearing the all-time low of 120 yen in January 1988. Against the German currency, the dollar has fallen to a post-World War II low of about 1.48 marks.
Why is the dollar weak?
``It is basically the market view that the US economy is softening and US interest rates are going lower,'' Mr. Hormats says. Foreign investors are also concerned about the soundness of US economic management, noting the savings-and-loan crisis, the troubles of commercial banks, and the growth of the federal deficit, the Wall Street investment banker adds.
Economists point to several other effects of the weak dollar - some positive, some negative:
1. By stimulating exports and discouraging imports, it should moderate the economic downturn in the US.
DRI/McGraw-Hill figures that without the improvement in net trade, the severity of the current ``recession'' would roughly double to a decline in national output of about 2 percent.
The decline in the dollar since it peaked in February 1985 has helped boost US exports as a share of total exports of the Group of Seven industrial democracies from 19 percent in 1986 to about 26 percent this year, notes Dr. Wyss.
2. Despite the run-up in oil prices since Iraq invaded Kuwait, the balance of payments of the US should improve.
DRI/McGraw-Hill estimates that the merchandise trade deficit of $109.4 billion in 1989 should drop slowly to $105.8 billion this year, $104.2 billion in 1991, and $77.6 billion in 1992. The economic consulting firm further forecasts that the deficit in the current account - a broader measure that includes international transactions in services and investments as well as merchandise trade - should decline from $110 billion in 1989 to $102 billion this year, $102.3 billion in 1991, and $71.2 billion in 1992.
3. The weak dollar will add modestly to US inflation as imports become more expensive.
4. Next summer European and Japanese tourists could flood the US, taking advantage of their strong currencies. Americans going abroad, however, could suffer from ``sticker shock.''
Swiss Bank Corporation regularly attempts to measure the purchasing-power parity of major currencies - the exchange rate at which currencies buy the equivalent amount of goods in their respective economies. Though it is difficult to put together an identical ``basket'' of goods across countries, the US dollar is probably about 15 percent undervalued against the German mark, calculates Gilbert Benz, a Swiss Bank economist in New York.
Nonetheless, he says: ``I don't think we have seen the bottom in the value of the dollar.''
5. The weak dollar has made it easier for Western Europe and Japan to manage the higher price of oil, which is priced in US dollars. That, says Alan Benasuli, research director for Smith Barney, Harris Upham & Co., may be one reason for the ``benign neglect'' of the sliding dollar by European countries and Japan, as well as the Bush administration. There has been no recent government effort to prop up its value.
Only French Finance Minister Pierre B'er'egovoy has said the Group of Seven should do something about the weak dollar. He is concerned about the prospects for French exports.
6. Many institutional investors have been attracted by higher interest rates abroad - a reversal of the pattern a year ago.
Indeed, the Bundesbank, Germany's central bank, boosted its key ``Lombard rate'' on Nov. 1 by 0.5 percent to 8.5 percent in a move to fight inflation and assure Germany of the capital needed to finance unification. By now, a short-term Euromark investment yields about 8.7 percent, while a Eurodollar investment gets only 8.25 percent. If comparative inflation rates in Germany and the US are considered, this German investment becomes even more attractive. A similar situation prevails in Japan.
Richard Cooper, a Harvard University economist, figures the Germans will be drawing on both domestic and foreign savings to finance the budget costs of modernizing and maintaining the economy of what was East Germany. This requires high interest rates and thus a strong deutschemark that will over time reduce the German export surplus. Since several other European countries tie their currencies to the mark by choice or as members of the European Monetary System, these nations too could face the competitive pressures resulting from a high exchange rate.