Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: TUESDAY, March 7, 1995 TAG: 9503070131
SECTION: NATIONAL/INTERNATIONAL PAGE: A1 EDITION: METRO
SOURCE: THE NEW YORK TIMES
DATELINE: WASHINGTON LENGTH: Medium
The dollar's weakness clearly is worrying the Clinton administration, as demonstrated by the coordinated intervention in currency markets it led Friday to try to support the dollar. But that effort failed.
And as officials scramble for a strategy that would revive the U.S. currency without running the risk of tipping the U.S. economy into a recession, they appear to be running out of options.
The recent plunge seems to have been driven by an odd mixture of concerns. One is that the administration would get sucked deeper into Mexico's financial crisis, which deepened Monday as the peso fell to a record low against the dollar.
Fear that the Mexican crisis could spread to the rest of Latin America is also weighing on the dollar. In addition, there is concern that the failure of the balanced-budget amendment in the Senate last week presages continuing huge deficits.
But the solution that the financial markets appeared to be demanding, another increase in interest rates to lure foreign investors to buy dollars again, is fraught with economic and political problems for the Federal Reserve and the White House.
In the past - including June's big drop in the value of the currency - the Fed consistently has resisted any effort to prop up the dollar with higher interest rates, maintaining that interest rates should reflect domestic economic conditions, not fluctuations in the currency markets.
Federal Reserve officials have hinted repeatedly in recent weeks that their year of raising interest rates has been just about enough to assure a ``soft landing'' for the economy. They intend for the economy to slow to a moderate pace but avoid a downturn.
Many economists fear that another big increase could slow the economy too much. If a downturn came as a result of action by the Federal Reserve, it probably would become clear to the public about nine months to a year from now, or as one administration official noted ruefully Monday, ``just around the time of the primaries.''
The White House and the Treasury, apparently acknowledging the unhappy choices they face, said nothing Monday about the startling drop.
Treasury Secretary Robert Rubin did not repeat his statement of last Friday that ``a strong dollar is in our national interest,'' and there was no evidence of any effort by the United States to intervene in markets by buying dollars.
For American exporters, the weaker dollar can be good news because it makes their products less expensive abroad. But for European manufacturers selling to the United States, the weaker dollar means their goods - like automobiles - become more expensive and harder to sell.
Another fallout is that the higher price of imports could add to inflation. But this impact might be muted by the fact that two major trading partners of the United States are Canada and Mexico, whose currencies have been falling against the dollar.
For the Clinton administration, the problem is not so much a falling dollar but the possibility that the currency could suddenly fall quickly and sharply, which would very likely send both stock and bond markets lower and create a broader financial crisis that they would have to do something about quickly.
``I think what is happening is that the North American continent is looking hopelessly in debt,'' said David F. DeRosa, a director of foreign exchange trading at Swiss Bank Corp. in New York. ``And the worst problem is in Mexico.''
The administration's biggest problem now may be that the world is believing the rhetoric it employed to win support for its $20 billion aid package for Mexico's troubled economy, especially Clinton's insistence that the Mexican and American economies were intertwined.
by CNB