Dollar Turmoil

CAMBRIDGE: Among most currencies the dollar is king, but held against the DM and the Yen it is the beggar. In the last two years alone, the dollar declined 20 to 25 percent against these two key currencies. Over the past decade the decline amounts to 50 to 75 percent respectively. One might reasonably ask, what is wrong with the dollar. But the right question is really what is wrong with the DM and the Yen that makes the market price them so aggressively that business can hardly survive.The foreign exchange market makes German and Japanese labor look a lot better than in can possibly be. In West Germany, hourly compensation now is almost $20 per hour. In Japan it is up to $25. Compare that with only $17 in the United States!

In the United States, the low and falling dollar is not a headline issue. Nobody cares much, or if they do, they view dollar decline as good news for exporters and wonderful news for firms that compete with imports. Because the US enjoys financial stability --full employment, very moderate

inflation of 2 -3 percent per year, a budget deficit smaller (as a share of GDP) than that of Japan or Germany, a public debt ratio that is enviably low compared to most industrial countries – dollar decline is just not a threat. Moreover, the US is a large, relatively closed economy. As a result, dollar decline has very little impact on inflation. In fact, it has so far had absolutely no perceptible impact. On the US side then, dollar collapse in not a front page story.

In Japan things are different. The Japanese are like mice on a treadmill: they are moving production offshore to low labor cost locations in the United States, in Thailand, in Indonesia,wherever entry and even mid-level products (measured in terms of required labor skills) can be produced more profitably than in high wage Japan. But even as production moves offshore, wave after wave of Yen appreciation hits the manufacturing sector and requires yet more efforts and adjustment. Export volume has stagnated and imports are rising at double digit levels.