The declining American dollar

Press, 19 August 1978, Page 14

The declining American dollar

President Carter has apparently decided that something has to be done about the decline in the value of the American dollar. One small effect of the recent confusion in overseas currency was the New Zealand Reserve Bank's suspension of foreign currency dealings other than those in the American dollar This has been a minor inconvenience compared with the dislocations in trade and finance around the world About 80 per cent of the world’s foreign exchange reserves are held in American dollars and a substantial proportion of world trade is conducted in American dollars. A declining American dollar disrupts world trade, not merely to the disadvantage of the United States but to the disquiet of the rest of the world.

President Carter has been under international and domestic pressure to stop the dollar declining further. The international pressure comes from world traders and particularly from the oil-exporting countries. These countries see their revenue diminishing because the oil prices are measured in the American dollar. In reply, they have threatened to increase the price of oil so that they are not the losers in the slide. Neither the United States nor the rest of the world wants to see a rise in the price of oil. At home President Carter finds the American people greatly concerned about inflation running a rate which is modest bv New Zealand’s recent standards. The declining value of the dollar means that imports are dearer and gives the excuse to domestic producers to increase their prices.

The classical response to a declining currency would be such tighter monetary’ policies as increasing interest rates President Carter may be forced to apply these answers, and he may, as a result, attract a certain amount of

investment back to the United States Yet however much the United States fears inflation, the Carter Administration fears a deepening of the recession, which could be brought about by restrictions on the economy. Although both the Administration and Congress want cuts in Government spending, and these would be a necessary step accompanying a tighter money policy, neither has showed much willingness to cut specific programmes of spending. Another way to force the United States to bring its trade into balance and to restore value to the dollar would be to reduce imports. Unless American import cuts were restricted to oil, the effects around the world would be disastrous. Such a protectionist action would go against both the trade pledge made by the countries within the Organisation for Economic Co-operation and Development, and against the intentions expressed by President Carter and others at the Bonn economic summit in July. If President Carter can get oil imports down, he will have gone a long way to fixing the external payments problem of the United States. Some positive action by Japan in taking more American exports would also help considerably.

A tighter American economy would be bad news for New Zealand. It is as well for this country that the United States Administration has shown such an awareness of the impact of the American economy on world trade. Yet while the United States continues to have such a deficit in its external trade, stable international markets, which could lead to a growth in world trade, seem unlikely. Unstable international markets will probably lead to calls for protective trade measures which, if taken, would plunge the world into a deep depression.