In US, a rare revolt against dollar

The United States dollar has come under siege. But it's not on foreign-exchange markets, where the dollar stands at about a 16-year high. It's under fire at home.

Farmers, manufacturers, and organized labor are calling for a retreat from the "strong dollar" policy that was a mainstay of the 1990s boom.

"Our export business is off 50 percent," says Martin Slagle, a senior vice president at Morgan Manufacturing Co., a maker of truck-mounted concrete pumps in Yankton, S.D. "The strength of the dollar ... has devastated us."

Since 1995, the dollar is up 70 percent against the German mark and some other key European currencies. It has soared 50 percent against the Japanese yen.

The result: US exports are more expensive to foreign buyers, causing a severe downturn and layoffs in some industries.

Usually, exchange rates are of interest only to economists, corporate accountants, and tourists boarding a plane for Paris.

But as the US economy has weakened, the issue has been coming into sharper focus, with mounting pressure on the Bush administration.

Prior to a summit of major industrial nations last month, the National Association of Manufacturers (NAM) sent a letter to President Bush, asking him to "make currency realignment a top economic priority." He hasn't.

"The dollar is ridiculously overpriced," says Frank Vargo of the 14,000-member group, which is based in Washington.

John Sweeney, president of the AFL-CIO, the nation's labor federation, echoed the plea in a simultaneous letter to Mr. Bush.

In the next week or so, the NAM expects to announce a coalition of various trade associations to fight for a weaker dollar.

But figuring the "right" level is difficult. A strong dollar hurts some Americans, but benefits others. Consumers get cheaper cars and other goods. Tourists abroad enjoy a cheap trip. US exporters suffer. So do American tourist facilities.

Moreover, actually engineering a change in currency values is difficult, and holds significant risks.

A shift in rhetoric by the Treasury secretary is sometimes enough to move exchange rates, and central banks occasionally intervene in currency markets. But by and large, exchange rates are set by supply and demand.

Currently, foreigners want dollars to invest in the US, and that desire allows the US economy to import more goods than it exports. In fact, foreigners are happily sinking nearly $600 billion a year into US bonds, stocks, companies, and real estate.

But when sentiments change, they can sometimes be hard to control.

"If foreign investors' appetite for dollar-denominated assets were to diminish, the result could be a sharp plunge in the value of the dollar and potential havoc in the US bond and equity markets," economist William Dudley told a Senate Banking subcommittee hearing July 25.

Mr. Dudley, with Goldman Sachs & Co. in New York, calls for moves to weaken the dollar now, rather than face the risk of a sharp drop later.

During the boom years of the 1990s, the strong dollar was not a major issue. American firms were mostly prosperous and their workers had ample jobs.

Surging imports, meanwhile, helped keep the lid on the pressure-cooker economy. The abundance of low-cost goods helped keep inflation in check.

A robust currency has also been viewed as a welcome vote of confidence in America.

Thus, Treasury Secretary Paul O'Neill, after a brief reformulation of language last winter, has reverted to the two-word mantra used by his predecessors since 1994: "strong dollar."

But the economic slowdown has made taming inflation less important, and the health of exports more so.

Vargo maintains that the dollar has been forced too high, partly because of foreign speculation.

A word from Washington - or even an international proclamation like the Plaza Accord of 1985 - could potentially weaken the greenback. In that year, the finance ministers of the major industrial nations got together at New York's Plaza Hotel to call jointly for a lower dollar value.

Then as now, a mighty dollar was damaging US companies and farm exports. At that time, the US economy was emerging from a severe recession. At present, the US economy is close to recession.

So far, the Bush administration has opted to let foreign-exchange markets largely determine the dollar's value.

"The basic truth is we don't have a [dollar] policy," says Harvard University economist Richard Cooper.

Neither the Federal Reserve, the nation's central bank, nor the Treasury has been intervening in currency markets this year. Last fall, though, Washington did briefly buy some euros to strengthen that faltering currency, thereby in effect weakening the dollar.

Mr. Cooper says the Fed should accumulate some euros, in case they are needed in the future to support a weakening dollar.

In economic theory, the Fed's move to boost the economy by lowering short-term interest rates by three percentage points so far this year should have lowered the dollar.

This policy adds to the supply of dollars. The slump in the US economy should also have weakened the attractiveness of the dollar.

But the dollar has held strong, fading just a little in recent days.

"I'm not convinced the dollar-euro relationship will change dramatically," says Ulrich Ramm, chief economist of Commerzbank in Frankfurt, Germany. "Outside the United States, the dollar sentiment is coming down a bit."

Exporters, for now, will keep prodding and cajoling for a more significant policy shift at home.