Bypassing the Buck

THE Clinton administration's desire last year for a weaker dollar, seen in large part as a move to boost the value of the yen to cut into Japan's trade surplus with the United States, is coming back with a vengeance. Absent a convincing defense of the dollar, the White House could run the risk of stifling the recovery, even if the Federal Reserve holds the line on short-term interest rates.

During the past few weeks, the dollar has been rapidly falling against such major currencies as the Japanese yen and the German mark. For the first time since the postwar exchange-rate system was set up, the yen pierced a psychological barrier, closing yesterday in Tokyo at less than 100 to the dollar.

Yet investors, hoping to hear that the administration would defend the dollar, got only a tepid response at the end of last week. Central banks intervened to prop up the dollar - and spent only about $3 billion to do it. President Clinton deferred questions about the dollar to Treasury Secretary Lloyd Bentsen, who expressed some concern. But it was left to an ``anonymous'' Treasury source to clearly state a desire for a stronger dollar.

Seeing that the US wasn't inclined to do much, investors continued to put their money in other currencies - particularly the mark and the yen.

Under other circumstances, the US approach might be reasonable. But the nation's large current-account deficit, running at an annual rate of roughly $148 billion, has left the world awash in greenbacks. Interest rates in Germany, France, and Britain are higher than those in the US, making investments there more attractive not only to foreign investors but to their own domestic investors as well. The administration faces a dilemma: It can encourage the Fed to edge interest rates up, which could further slow the US recovery but which could narrow the gap between US rates and those overseas. Or it can sit tight and watch the falling dollar possibly boost the interest rates on long-term bonds. Because these serve as benchmarks for home mortgages, rising mortgage rates also could undercut the recovery by slowing the domestic demand for housing.

The lack of a quick, meaningful response has left no good choices. Raising short-term interest rates is a last resort. The Treasury should engineer a strategy with its G-7 partners to increase the risk for currency speculators and intervene later in a more convincing way to boost the dollar.