U.S. dollar battered by strong currencies

Press, 4 July 1978, Page 6

U.S. dollar battered by strong currencies

Bv

ADRIAN BROKKING,

commercial editor

The United State? dollar is,! at present, receiving a ter-! nble pounding in the foreign: exchange markets, at the! hands of the world's strong currencies—especially thej Japanese yen. What does this mean; especially what does it mean for New Zealand 1 The basic reasons for the 1 weakness of the American ] currency is a lack of faith 1 bv non-American holders of dollars in the prospects ol! the United States economy.! Consequently, they do notj want to hold their money to dollars, but in another cur-’ rency in which they have ■ more confidence. Selling currency, on a free] market, mean-—as would [ happen to any other com- ’ medity—that its price will be forced down. Much of this pressure is> reinforced bv the movements in speculative balances, that; is money not used in trade] but held as reserves by coun-1 tries, banks, and traders. The banks of those non- 1 American countries who feel that they want to support the dollar, would try to keep up its price bv buying dol-! lars. mst as American banks would try to achieve the -ame object by selling whatever foreign currencies were being sought. But these actions will only be successful to the extent that they restore confidence If the dealers believe that they are onlv technical actions, and the Governments concerned fail to deal with economic problem.- in a manner which lends belief that they are coming to grips with them, buvina or selling bv banks will do little to underpin the currency, especially if the holdings of currency in non-American hands are large. The people dealing in cur-, rencies are worried over the, anparent weaknesses in the United States economy—’ especially the large ba!ance-of-payments deficits, because large trade deficits are likely to lead, sooner or iater. to currency devaluations. And no one wants to; hang on to something that mav lose Its value. Every time an event occurs which is interpreted as weakening the United States economv—such as rhe r“fusal bv the United States Senate to allow President < arter to impose oi' import! fees—the dollar is likely to take another tumble The value of the New Zea-,

I land dollar is calculated | every day by the Reserve i I Bank relative to a number of 5 foreign currencies, on the basis of the settlements in these currencies proportional to total foreign exchange ■ dealings. The formula used is quite 1 complex, and only the i Reserve Bank knows what it i is, but roughly it means that j if half of our trade is done m i one currency, and that curi rency were to fall, the New i Zealand dollar would rise against that currency and fall 1 (against all other currencies i according to their relative strength and the amount ot our trade tn them. Needless to say, the Reserve Bank uses a com- ; puter to work this out. The formula is basically tied to • the value of the United ; States dollar. Therefore, in the present i context, our currency becomes stronger against thej dollar, end all currencies that! are falling with the dollar,] | but weaker against those cur-| 'rencies that are strong, against the United States dol-j iar Currencies tnat are at pres-* • ent strong against the United States dollar are: the Japan-,; 'ese yen, British sterling.

Swiss franc, French franc, the Netherlands' guilder, Fijian dollar, and the Indian rupee bloc. Against those countries | our trading position improves t— to the extent that our ex--1 ports would be cheaper to | them. Therefore, everything I else being equal, we might 'expect to sell more to them while our imports from these countries may be expected to fall, as they become dearer to us. The balance of trade with! these countries may therefore be expected to shift into curl favour. By the same token, out trading with the countries! whose currencies are falling 1 j against the N.Z. dollar, would jin the long run become more ; difficult, and the relative bal- ■ ante of payments would 'move against us. 1 However, there are many I other factors which affect (trade between countries. ! Where quotas are imposed, iso that trade is relatively (constant, at least in the short 1 run. irrespective of the relaItive values of the currencies, •a fall in the foreign curirency would mean lower export earnings. And. of course, the reverse would be true.