The popular currency superbowl

Press, 24 May 1988, Page 31

The popular currency superbowl

A comment by

JOHN P. CLAY

of Globe Finlay, in New York

One of the most popular sports events in the world, ever since the United States cut the dollar-gold link in 1973, has been the Currency Superbowl — America v. Rest of the World.

Those spectators who guessed right on the successive highs and lows of the dollar did not have to do much else in order to come out handsome winners.

It is therefore natural that they are all now trying to pick the turning point from which the dollar will again soar, and much dispute centres on whether the bottom has or has .not yet been reached. Reality may unfortunately be rather different this time round; and to see why we need to analyse the facts and figures more carefully. Looked at from a European point of view, the dollar is already quite cheap enough; the sales of Porsches have collapsed,

and the European surplus with the United States is falling to levels that would normally cause little concern.

Higher United States interest rates should easily suck in enough European money to finance the deficit, and in so doing set the dollar again on a rising trend. The view from Tokyo is not at all like this. Japan (and with it much of Eastern Asia) has got into a virtuous circle: high savings are generating large productivity gains, and a rising yen is cutting raw material costs, so prices remain competitive and Toyotas continue to sell briskly. This creates more profit, hence more savings, and pushes the yen up even further, so prices ... and so on.

Japanese industry has given up worrying about any particular exchange

rate, and worries only; about the gradient of the change; so long as the yen does not rise too fast, everything is fine. Government responds to these concerns by buying dollars to moderate the yen’s rise, the resultant increase in domestic liquidity feeds through to lower interest rates, and competitivness gets a further boost. No circle, however virtuous, can be expected to last for ever, but it is important to understand that this- one is in many ways inherently stable, and could conceivably go on for a long time. Dr Wojnilower of First Boston points out that Japan is now a highly developed country in production terms, but still an underdeveloped one in consumption terms (Britain was much the same in the last century, though for rather dif-

ferent reasons); the mar-ket-clearing rate of exchange between such a high-production economy and other, high consumption economies may turn out to be at a pretty surprising level. (It should be noted that, from a broad-brush point of view, this is all bullish for the world economy; the “East Asia Syndrome” is a real supply-side boost, quite unlike the fake sup-ply-side produced by Reagonomics, and should stimulate non-inflationary growth just about everywhere.)

What could change the position? Much more consumption in Japan, and less in the United States would soon change things, but neither of these eventualities looks imminent, at least on the scale necessary to produce a turn-around. Alternatively, a large

and sudden rise in the yen would break the circle; but the other side of that coin, a brutal fall in the dollar, introduces another set of risks, and all the participants in the game will try to avoid that.

For the moment, the decline in the Japanese surplus is no more than ■gentle; and while it might accelerate, there are also some reasons to believe that it could just as easily reverse.

All in all, the only safe conclusion is that the teams have had a major rearrangement. The new Superbowl is not America v. Rest of the World, but Atlantic v. Pacific; the spectators cannot rely on past form in deciding where to place their bets. It should be an exciting game to watch; perhaps a little too exciting, even? Globe Finlay are international advisers and managers for the Sharemarket Trust.