Dollar's strength fading worldwide

WASHINGTON -- The high-flying dollar, which has given Americans price breaks on everything from Paris vacations to imported cars and television sets, is losing altitude.

Over the past three months, the dollar has slipped by 6 percent against major currencies, raising concerns that this could be the end of a heady seven-year run as the world's supercurrency.

"I think we are at a turning point for the dollar, and we are looking for an extended period when the dollar will be declining in value against other currencies," David Wyss, chief economist at Standard & Poor's Co. in New York, said Wednesday.

For American shoppers, the past seven years have been a great ride.

The dollar stood 40 percent higher in value against the major currencies of the world in January than it did at its low point in the spring of 1995 -- quite a price break on foreign goods for American consumers.

American manufacturers, however, have a different story to tell. The dollar's strength has opened them to intense competition from lower-priced imports and made their exports more expensive overseas.

The National Association of Manufacturers, leading a drive to pressure the Bush administration to change its policy on the dollar, estimates that the overvalued dollar has cost U.S. companies $140 billion in lost export sales over the past 18 months and resulted in half a million job layoffs.

So far, Treasury Secretary Paul O'Neill, the administration's spokesman on the dollar, has been unwilling to waver from the policy set by his Clinton administration predecessors, Robert Rubin and Lawrence Summers, whose mantra remained: "A strong dollar is in the best interests of the United States."

O'Neill, with his usual bluntness, told the Senate Banking Committee on May 1, "There is no intent with anything I say to give comfort to those who think I am going to change our policy."

But even with those words, the dollar has continued to fall on the world's currency markets, where $1.2 trillion worth of currencies change hands daily.

The drop against the yen was so sharp last week that an alarmed Japanese government intervened to sell yen and buy dollars to prop up the greenback.

Some analysts believe O'Neill, while maintaining he was not changing dollar policy, signaled a subtle shift with his comments at the hearing that he did not believe intervention, a government's buying and selling of its own currency, could work over the long term.

"Exchange markets are picking up on the fact that O'Neill doesn't believe in currency intervention, that a country's currency should reflect economic fundamentals," said Frank Vargo, the National Association of Manufacturers' vice president for international affairs.

Vargo said that NAM would like to see the dollar decline in value by about 20 percent. "We don't want it to collapse. We just want to see a gentle glide path to a more appropriate level," he said.

Such a change would make U.S. products more competitive and make imports more expensive and less desirable for American consumers, helping to narrow the country's massive foreign trade deficits.

The weaker dollar will also mean higher inflation in this country. But with consumer prices rising by a tiny 1.6 percent last year, there is room for inflation to move higher without serious problems, economists said.

They said the biggest danger in coming months is that a declining dollar will make foreigners less willing to invest in the United States because of fear their earnings will be worth less when converted into their home currencies.

"The fear is that foreign investors could all run for the door at the same time, sending the dollar plunging," said Mark Zandi, chief economist at Economy.com.

Such a development could send stock prices sharply lower and cause a huge jump in long-term interest rates. Foreigners hold about 10 percent of U.S. stocks and 35 percent of U.S. Treasury bonds.

Most analysts view that as a remote possibility, saying this country still offers better rates of return on investments than either Europe or Japan.

"The dollar has peaked, but a precipitous drop is not in the cards," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis.

Wyss said he looked for a gradual decline in the dollar, with a chance of "triple parity" a year from now.

By that he meant that one dollar would buy one euro and 100 yen. In late trading Wednesday, the dollar fell against both the euro and the yen. It required 93.65 cents to buy one euro, compared to 92.91 cents on Tuesday, and one dollar was fetching 124.34 yen, compared to 124.47 yen in late New York trading Tuesday.

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On the Net: Federal Reserve daily exchange rates: http://www.federalreserve.gov/releases/h10/update/