Sinking Us dollar: what it means

As the US dollar sinks in value overseas, Americans learn again how closely linked their giant economy is to the rest of the world. Interest rates are dropping sharply in the United States, which is welcome news to most Americans as a harbinger that inflation may begin to subside.

But money managers overseas, including Americans handling multinational accounts, apparently take a different view, impelling them to downgrade the dollar.

For one thing, lower US interest rates take some of the bloom off the dollar as an attractive investment.

To put this in domestic terms, Americans now earning 15 percent interest on six-month certificates of deposit may get only 10 percent or less the next time around, as interest rates plunge.

So overseas investors, who had rushed to the dollar when the Federal Reserve Board pushed interest rates to record highs, now are taking back some of their money and looking elsewhere.

Beyond this may be a belief that, as recession spreads in the US, President Carter and Congress will lose heart in their tough fight against inflation and begin to stimulate the economy.

With the underlying US inflation rate (minus energy and mortgage cost fluctuations) now running at 10 percent or higher, stimulation -- as currency experts read it -- would propel the United states into still higher basic inflation.

A cheaper dollar somewhat helps the United States, because it makes American exports less costly for foreigners to buy.

But that same cheaper dollar pushes up the price of foreign goods, making them more expensive for Americans to import. This adds to inflation.

This is true not only of cars, electronic products, cameras, and other consumer goods, but also of basic raw materials and commodities which the US acquires from overseas.

A wider danger exists, says a highly placed banking expert, in the existence of $600 billion or more in the Eurodollar and petrodollar markets, outside United States control.

Loss of foreign confidence in the dollar, the source said, could trigger a rush to exchange dollars for stronger currencies, gold, and other assets.

Some foreign banks, dependent on holding large dollar deposits, could be weakened in the process, sending tremors through the international banking system.

Experts warn that the US and other industrial nations are sailing in uncharted economic waters -- marked by extremely high inflation, accompanied by rising unemployment and widening recession.

In these circumstances, public and investor confidence in the Western world's economic system is fragile, subjecting the system, says a top highly placed US official, to potential shocks.

He cited a joint effort by the Federal Reserve Board and leading US banks to contain the damage caused by the recent silver speculation crisis, which sent silver prices to dizzying heights and then plunged them to the celler, threatening to undermine fortunes and investment houses along the way.

A broader shock, this source said, could be triggered by loss of investor confidence in the dollar, leading to a run on dollar deposits in banks overseas.

Says Federal Reserve Board chairman Paul A. Volcker: "There now is a willingness [in Washington] to recognize that external problems of the dollar also are internal."

Economic moves by the US government, in other words, must be measured not only by what they accomplish within the United States, but by their effect on vast holdings of dollars overseas.

These holdings steadily grow, as Americans send treasure abroad to pay for foreign oil -- possibly $90 billion this year.

Net outflow, of course, is much smaller, because the US earns a great deal of money back through foreign trade. Also, Middle Eastern investors place many of their surplus dollars in the United States.

Militants within the Organization of Petroleum Exporting Countries (OPEC) already argue, as the dollar weakens, that the price of oil should be raised.

Inflation and a shrinking dollar, OPEC officials say, reduce the real income of cartel members, whose oil is priced in dollars.

US officials hope that energy prices this year will rise by no more than 20 percent, compared with more than 100 percent in 1979. The average price of world oil now is $29.61 a barrel, according to the Department of Energy, against