Setback for the Greenback

In the coldest, darkest days of the global fuel shortage last winter, Americans could console themselves that the long-ailing dollar was making a valiant recovery. Money traders were eagerly buying dollars because they thought the U.S. would suffer less from the oil squeeze than other countries, and because they were impressed by the fact that two painful dollar devaluations had swung the U.S. trade balance back into the black. The turnaround proved shortlived; in recent months the dollar's value has sunk enough to wipe out almost all the gains posted during the fuel crisis.

As of last October, according to an index kept by Morgan Guaranty Trust Co., the dollar had lost more than 9% of its value, measured in terms of major foreign currencies, since December 1971. By January, the loss had shriveled to a mere one-half of 1%, but by last week it was back up to 8.1%. The decline makes American products cheaper overseas and thus easier to export. But it also fans U.S. inflation by making imports more expensive. And it adds greatly to the bills run up by tourists, who are still being lured by now outdated airline ads that talk of the dollar's renewed strength in Europe.

The dollar's current setback reflects a complex of U.S. economic ills. American inflation is now running at a compound annual rate of 14%, higher than in eight countries of Western Europe, and in the first quarter of 1974, the U.S. output of goods and services fell at an annual rate of 5.8%. That combination of inflation and downturn has upset money traders, who also note that the U.S. trade surplus gave way to a $171 million deficit in March.

Extraordinary Mark. The dollar has dropped lowest against the Deutsche Mark, which is benefiting from a West German economic miracle that looks more miraculous than ever. Last week Bonn reported that West Germany registered a trade surplus of $1.9 billion in March alone. The performance is all the more staggering because four mark revaluations, combined with inflation, have doubled the prices of most German products on world markets in the last five years. Indeed several scholarly institutes in West Germany are suggesting that the time is ripe for yet another revaluation of the mark.

The mark, in fact, is no longer an ordinary currency; it has become the de facto leader of a whole block of currencies issued by countries that make up an unofficial "Deutsche Mark zone." Include the Dutch guilder, the Belgian franc, the Luxembourg franc, the Danish, Swedish and Norwegian kroner, the Swiss franc and the Austrian schilling. They tend to rise and fall with the mark, so the mark's strength has pushed the value of the dollar down against all of them.

The dollar's true strength or weakness against other European currencies is difficult to judge because of a series of special circumstances. The greenback has dropped just a bit against the French franc because Paris is deliberately holding the value of the franc down in order to gain a trade advantage over other countries. The Italian lira is in trouble as usual but even so, it has gained against the dollar since January--though only because the Bank of Italy has been spending as much as $100 million a day to prop up the lira's price.

The case of the British pound is the most curious of all. Britain's troubles with inflation and economic stagnation are, if anything, even worse than those of the U.S., but 26% of all payments for oil going to Saudi Arabia and all payments to Kuwait and the United Arab Emirates are in pounds.

The Saudis do not want to rely exclusively on the precarious dollar. The petroleum potentates in the former British sphere of influence along the Persian Gulf demand only pounds for oil because they benefit from Bank of England guarantees against devaluation losses, and because they get higher interest on sterling accounts than on Eurodollar deposits. So the nearly fourfold inflation in the posted price of Arab oil has pumped up demand for sterling, and the dollar's value against the pound has fallen. The thought that the drop defies economic reality is no comfort at all for American tourists who plan trips to London this year.

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