US, trading partners riding currency seesaw
For the United States the problem is clear: Europe and Japan must stimulate their own economies to take pressure off the soaring American trade deficit. For the Japanese and Europeans the problem is also clear: The US must pare its budget deficit and stabilize the value of the US dollar.
Starting this weekend, the US and its trading partners will have the opportunity to try to sort out their differences. Finance ministers from Europe and Japan are expected to meet with Treasury Secretary James A. Baker III sometime during the annual meeting in Washington of the World Bank and the International Monetary Fund (IMF).
If the issue is not resolved, says Willy de Clercq, European Community commissioner for external relations and foreign trade, ``there is the menace of a possibility of a confrontation.'' On Wednesday, Mr. de Clercq told reporters here that the uncertainty over US actions was ``causing and creating a disruptive effect on currency and trade markets.''
To try to calm the markets, some US officials have already started to make mediating statements. Paul Volcker, chairman of the Federal Reserve Board, in testimony before Congress on Wednesday, said he felt the US dollar had fallen enough. Mr. Volcker said, ``I'm not sure a further adjustment is necessary.''
However, Secretary Baker threatened last week to nudge the dollar lower if the Europeans, particularly the Germans, don't act to stimulate their economies.
In his meeting with reporters, Mr. de Clercq pointed to a statement made by Martin Feldstein, the influential president of the National Bureau of Economic Research, that the dollar should continue to devalue. ``We think the dollar has gone down far enough,'' stated Mr. de Clercq, ``and it should stay where it is.''
This disagreement over exchange rates comes barely a year after officials of the US and four of its trading partners met at the Plaza Hotel in New York. The resulting so-called ``Plaza accord'' set the framework for the fall of the dollar and an agreement by the nations for normal moves in their currencies. Since then the dollar has dropped 40 percent in value, and de Clercq says ``there is a problem of credibility'' because the dollar has fallen so far, so fast.
A Reagan administration official, however, disagrees, saying: ``We don't believe we are in violation of the Plaza accord. We believe the dollar has come down in an orderly way.''
De Clercq disputes Secretary Baker's view that a lower dollar will help the US because it would mean fewer European imports. ``Almost 80 percent of our exports are within the EC itself,'' he asserts. ``Because our markets are small, we are condemned to export.''
However, the administration source, who spoke on a background basis, said the US hopes if its trading partners stimulate their economies, internal demand in those countries will pick up.
The US has specifically tried to get West Germany to stimulate its economy. German loosening is the key to European expansion, explains David Wyss, chief financial economist for DRI, an economic forecasting service. ``Germany does not want to take over for Europe, a role they could play if they were willing,'' Mr. Wyss states.
The US recently has been pressuring West Germany to lower interest rates in an effort to spark its economy. However, the Germans have resisted this move. For example, since Janauary, US interest rates on three-month dollar deposits in Europe have fallen from 8.2 percent to 5.8 percent. Rates on three-month yen deposits in Europe have fallen from 7 percent to 4.9 percent.
Although interest rates on deutsche marks have only dropped from 4.7 percent to 4.5 percent, the West German economy in the second quarter perked up considerably, growing at a 4 percent annual rate after growing at a 1 percent rate in the first quarter. However, the administration spokesman says, ``We don't think this rate will be sustained.'' Instead, the US is forecasting only a 3 percent growth rate for West Germany both this year and next year.
Wyss says he believes the Germans will restimulate their economy, particularly since they have elections coming up. However, he points out that the Germans are unlikely to surrender to US pressure. ``It's not a good way to get elected by doing what the US wants,'' states Wyss. ``This whole thing could probably get done sooner if everyone kept their mouth shut.''