Good news, bad news on strong dollar

The strong dollar has put more than $150 of extra purchasing power into the pockets of every American in the past four years. That's the positive aspect of what has become a hot issue in the nation's capital -- the soaring value of the dollar.

On the news that the total output of goods and services reached a 4.9 percent annual rate in the last quarter of 1984, higher than expected, the dollar set records against five of six major foreign currencies on Thursday. It continued its recordbreaking advance Friday, setting a 13-year high against the West German mark and the Dutch guilder.

``There are two sides to this problem,'' President Reagan noted at his Thursday night press conference. He emphasized the good side -- that people benefit by being able to buy inexpensive imports.

Congress, however, has been hearing more from those hurt by the 65 percent increase in the trade-weighted value of the dollar since the end of 1980 than from consumers enjoying a substantial boost in their living standard.

Farmers have been complaining, partly because of their difficulty in selling wheat and soybeans on world markets in competition with Western Europe, Argentina, Australia, or other countries with cheaper currencies. Domestic automakers are pushing for extension of ``voluntary'' export quotas on Japanese cars.

The mighty dollar has even chewed at the profits of some high-technology companies. Earlier this month, for example, International Business Machines Corporation announced that first-quarter earnings would be flat, in large part because its foreign earnings, exchanged into dollar terms, have slumped.

Testifying before the Senate Budget Committee Thursday, Rudiger Dornbusch, an economics professor at the Massachusetts Institute of Technology, said that the US has enjoyed an 11 percent gain in its terms of trade since 1980. In other words, the prices at which the US sold its exports increased relative to the prices of imports. This meant a transfer of real income from the rest of the world to the US economy amounting to 1 percent of total national output of goods and services -- or about $150 per head, $600 for a family of four.

Dr. Dornbusch also calculates that a 10 percent depreciation of the dollar would boost the inflation rate by as much as 2 percent. Others have suggested 1 percent. Conversely, he notes, a strengthening dollar has weakened inflation decidedly.

During his press conference, Mr. Reagan referred to the danger of the dollar's tumbling too fast, warning that it could ``put ourselves back into the inflation spiral, and that we don't want.'

Why is the dollar so strong?

Some economists have argued that the massive federal deficit has pushed up interest rates, which in turn attracts foreign investment. This extra demand pushes up the dollar's price on foreign-exchange markets in relation to the West German mark, the British pound, the Japanese yen, and other currencies.

But Manuel A. Johnson, assistant secretary for economic policy at the Treasury Department, has a different explanation. In an interview, he held that the value of the dollar has increased because ``we have policies now in this country which make investment in the United States attractive.''

He listed several reasons for this attractiveness:

The tax reductions of 1981 have boosted the after-tax return on individual and physical capital. Federal Reserve Board chairman Paul A. Volcker, in testimony before Congress on Wednesday, estimated a net capital inflow last year that approached $100 billion. He said ``it will probably need to be still larger this year.''

Monetary policy has reduced the rate of inflation, again making investment in the US more attractive.

The US has experienced a much more rapid recovery than its trading partners. Americans have used some of their larger incomes to buy imports.

The third world has become ``a highly risky investment situation'' because of its debt problems. Commercial banks and other financial institutions have pulled back from lending in these countries. Some funds from these institutions abroad have gone instead into the US for investment.

``That puts tremendous upward pressure on the dollar,'' says Johnson.

Some economists have suggested the dollar would weaken if Congress succeeds in its attempts to reduce the budget deficit.

Mr. Johnson sees some possibility that deficit reduction will trim interest rates and the dollar if it is a result of spending cuts.

He adds, however, that it could actually raise the price of the dollar on foreign-exchange markets if it ``improved the prospects for investment even more and attracted more capital.''

He says he finds ``little evidence'' that the deficit has pushed up interest rates, noting that rates have trended down since 1981, while deficits have grown. Moreover, he notes that the dollar has strengthened, while interest rates have fallen.

``There is no systematic relationship,'' he says.

Because of European concern over the strength of the dollar and the outflow of their capital, the US recently promised to intervene more in foreign-exchange markets. But some observers here see the shift in policy as primarily symbolic.

Johnson said the US will intervene when market conditions are disorderly -- and is ``a bit more relaxed'' about doing so as a result of political pressure from Europe and those hurt domestically by the strong dollar. But the Treasury ``still questions our ability to alter the exchange rates against the fundamentals,'' he adds.

Some congressmen have been toying with the idea of a general surcharge on imports.

But Johnson said this would be ``counterproductive for our own economy.'' It would raise prices, feeding inflation, and reduce the competitive pressures on US industry to become more efficient, he says.

Dr. Dornbusch also attacked the import surcharge proposal as ``terrible.'' It would, he said, ``likely provoke a 1930s-style retaliation, with adverse effects on our exports, world trade, and international payments.'' Debtor countries, finding it harder to export to raise the money to pay their interest bill, might default, he adds.

Eventually, economists say, the dollar will weaken. But most are unwilling to guess when. Citibank says only ``sometime during this year.'' -- 30 --