Exchange rates concern

Press, 21 May 1987, Page 26

Exchange rates concern

By

DAVID REES

of Reuters (through NZPA) London Gyrating currency values suggest a world economy going askew, and some economists and bankers say they worry that finding a new balance may be harder than Western governments apparently think. They are concerned that higher United States interest rates, to prop the weakened dollar, may aggravate the crisis over debt in the Third World, which owes SNZI7IO billion, and slow economic growth generally. They said that lower Japanese and West German interest rates, now sought by United States officials, may not do much to narrow the huge trade deficit which the United States is running. And that could send the price of the dollar in terms of other currencies still lower, forcing United

States interest rates even higher to lure investors back to dollar assets.

In theory, lower Japanese and West German interest rates should boost economic growth and so raise Japanese and West German consumers’ income and their demand for United States goods. And, the theory says, if West German and Japanese rates come down, the dollar need not fall further. But a number of economists and bankers feel the link between lower interest rates and more demand for imports is tenuous.

“How are you going to get the Japanese to buy American cars when Americans don’t even want to buy them? It is a question of quality and a question of price,” one French banker said He said he believes it is just as likely that lower Japanese interest rates would encourage exporting companies to invest A

and expand their ability to export. The idea that lower rates would encourage the Japanese to switch from saving money to spending it on U.S. imports may also be wishful thinking, said Evelyn Brody, an economist with Morgan Grenfell and Company, a London investment bank. “There’s been some suggestion that it would mean even more money would be set aside and saved, to make up for the lower interest rates,” she said.

Meanwhile, as the rest of the world waits for lower Japanese and West German interest rates, Brody said she’s growing concerned about the effect of higher U.S. interest rates on Third World debtors. Most of the interest payments on their debt are linked to U.S. rates, she said. A rise in U.S. interest rates this week steadied

the dollar, and some currency market dealers are talking now about the end of the dollar’s slide. Has the dollar fallen far enough now to start bringing the U.S. trade deficit down?

Richard Segal, an economist at Salomon Brothers International, said he thinks it has, although cutting the deficit will, be a slow process.

“But the trade balance is not really the problem,” said Sykes Wilford, an economist with Chase Manhattan Bank’s London office. “The trade balance is just the political issue.” He said he believes diplomatic discussions over trade tensions and currency market turmoil really turn on the question of the role of Japan and West Germany in the world economy. Both must become more important motors of world economic growth,

even at the risk of inflation as their domestic economies grow, he said. “They’re scared stiff of inflation, when the problem is deflation, the threat of protectionism and bankruptcy in Latin America,” said Wilford. U.S. officials say they are relatively optimistic the dollar will stabilise and trade tension will ease. Last week, a Reagan administration official said fears of recession were overdone.

"That’s the doomsday scenario which I reject, because it’s too bearish a view,” said the official, who asked not to be named.

An OECD background paper says it may take years to redress trade imbalances if Japan and West Germany fail to stimulate their economies and the United States does not curb its consumers’ demand for imports. ; 7 . {