Will the Buck Stop Here? Central Bankers Ask As US Dollar's Value Slips

PRESIDENT Carter had an inflation crisis. President Reagan presided over a stock-market crash. Now, President Clinton is faced with the threat of a dollar crisis.

Since Mr. Clinton took office, the United States dollar has depreciated nearly 25 percent against the Japanese yen and 12.55 percent compared with the German mark. Last week was a particularly troubling time for the greenback. It lost 4 percent to 5 percent against the two currencies. The dollar closed on Friday at 94.14 yen and 1.425 marks.

''What is happening to the dollar is very unsettling,'' says Harvey Hirschhorn, executive vice president at Stein Roe & Farnham, a Chicago investment manager.

The dollar is falling even as the Federal Reserve and other central banks are trying to stabilize it. Last Thursday the Fed bought US dollars in an unsuccessful effort to stem the slide. It was joined Friday by the central banks of Japan, Germany, Britain, Italy, France, and nine other European countries

A strong defense

On Friday, US Treasury Secretary Robert Rubin issued a strong defense of the dollar, stating, ''A strong dollar is in our national interest.''

But foreign-exchange markets shrugged off the statement and economists began to wonder if the dollar's slide might represent a shift in the way the dollar is perceived.

''It may be dawning more on people that the dollar is not that safe-haven reserve currency it used to be,'' says C. Michael Aho, an international economist at Prudential Securities Inc. in New York.

Some economists, however, believe the latest slide is related to factors outside of US control. For example, it is close to the Japanese corporate year-end when many companies repatriate their profits.

''There is a reduction in demand for dollars,'' explains Brian Fabbri, an economist with Paribas Capital Markets in New York.

Demand for marks is also strong in Europe where political problems are driving investors toward the German currency.

Last week, British Prime Minister John Major narrowly survived a vote of confidence on European issues and the French socialists are stronger than expected. In addition, some of the continent's weaker currencies, such as the Spanish peseta and Italian lira are falling.

Traders are also still unhappy over the US bailout of Mexico. ''It is the way we tried to handle it -- by throwing money at the problem,'' Mr. Hirschhorn says. ''We have not seen the end of the Mexican crisis and this has the foreign markets unsettled.''

In fact, on Friday, the peso plunged to an all-time low and the Mexican government seized a troubled bank.

As the Mexican economy soured -- with negative implications for the US trade account -- traders looked at Argentina, which is once again in economic straits. Stocks of Bank of Boston and Citicorp, the largest foreign banks in Argentina, fell sharply in price Friday.

''Will the US have to bail out Argentina as well?'' Mr. Aho asks.

The greenback's slide comes at a time when the US current account -- merchandise trade plus financial flows -- is showing a wide gap. To finance the deficit, the US needs to attract $500 million per day.

''If people are concerned about the exchange rate, we will have a hard time attracting the flows,'' says Robert Brusca, chief economist for Nikko Securities International Inc. in New York.

To attract foreign capital, the Fed could raise interest rates. European interest rates continue to rise while the US rate increase appears close to its peak. However, Alan Greenspan, in recent Congressional testimony, has suggested interest rates are on hold until the Fed sees clearer evidence about how the economy is responding to higher rates.

A soft landing

There are signs that the economy will have a ''soft landing,'' that is, a slowing without a recession. Consumer confidence is starting to fall, which should begin to slow retail sales. On Friday, the government reported that its index of leading indicators was flat in January. In addition, the government reported new factory orders in January rose only 0.6 percent, the smallest increase in three months.

Although the economy is slowing, some economists are concerned that the dollar's woes could add to inflation pressures.

''At this point we should start to worry about it,'' says John Williamson, a senior fellow at the Institute for International Economics in Washington.

Mr. Williamson says he believes the dollar is close to bottoming out. The stronger economies in Europe, he points out, will start to suck in more imports. Last month's trade figures indicate US exporters are already starting to increase their shipments abroad. As Europe absorbs more world trade, the US will import less. This could relieve selling pressure on the US dollar, he says.