A dominant dollar buoys US consumers

Despite a mammoth trade deficit and a wild stock market, the US dollar reigns as the king of currencies.

Now at its strongest level in 14 years, the dollar is giving a boost to many Americans, from those planning summer trips to Europe to consumers thinking of buying a Volkswagen bug.

By hitting a level not seen since the Red Sox were in the World Series, the strong dollar is a welcome sign of confidence among the foreigners who hold 55 percent of all greenbacks. That confidence is important, since many of those dollars end up in the now-turbulent US stock and bond markets.

And by making foreign-made goods less expensive, the dollar is helping to keep prices down - taking some pressure off the Federal Reserve in its quest to stamp out any sign of inflation in the economy.

The main reason for the greenback's dominance is rising US interest rates. For now, higher yields on investments outweigh the risk that Fed moves will cause a recession.

"US interest rates are very attractive to world investors," says Scott Grannis, a principal at Western Asset Management in Pasadena, Calif. "This is a real bull market for the dollar."

And that's been good news for American consumers.

Consider Carrie Fite of Chester, Pa., whose son sings with the Arch Diocesan Boy Choir of Philadelphia. In late June, the choir plans to make an eight-day trip to Portugal. Five years ago, the group made the same trip for $1,300 per boy. Now it costs $800 per child. "It's so much cheaper to go this time," Ms. Fite says.

The strong dollar has a flip side, of course: It has become harder to export Made-in-America items and draw foreign tourists to the Grand Canyon.

In fact, at some point the dollar may fall to bring America's record trade deficit back into balance, economists say.

But for now, rising interest rates promise to lure foreign investors. The Fed will meet May 16 and is expected to increase short-term rates by half of percentage point. Cooling the economy may require another hike - perhaps only a quarter of a percentage point - again in June.

The US economy is now running at about a 4.5 percent annual growth rate, higher than most projections and far stronger than Japan and Europe. By defying the Fed's cold-water treatment, the economy is sending its own signal to foreign investors.

"It boosts confidence in the US, and people are more willing to invest in US securities," says Brian Fabbri, chief economist at Paribas Corp., a broker dealer in New York.

There is also no question that the US Treasury is pleased with a strong dollar. By way of contrast, says Mr. Fabbri, the European Central Bank is undecided over whether to intervene to support the euro.

"You are getting all kinds of different messages from Brussels," he says.

With so many dollars held overseas, interest-rate changes in the US ripple through other economies.

For example, higher interest rates in the US make money more expensive in East Asian economies, which are not as economically fit as the US.

"Whatever you do internally in the US follows the law of unintended consequences," says William Rhodes, chief investment strategist at the Williams Capital Group, L.P., in New York.

So far, the strong dollar has not caused any country major problems.

But in the past it has. In the early 1990s, rising US interest rates forced Mexico to devalue its currency. The problem spread through South America. "If rates are climbing rapidly here, they may not dent our economy, but they sure can dent other people's economies," Mr. Rhodes says.

For most Americans, the stronger US dollar is a boon.

New Yorker Nadine Witkin is planning to enjoy the strong currency on a coming trip to Rome. She needs to buy a new purse, but has decided to postpone the purchase until she gets to Italy. "I think it will be a lot cheaper than in this country," she says.

Ms. Witkin, who used to live in France, says the powerful US dollar means that gastronomic treats are no longer budgetbusters.

"I was a waitress in Paris," Witkin says, "and when people used to buy a prix fixe meal, I used to advise them the coffee was extra and very expensive. Now, you can afford to buy the coffee, too."

Tourists and businesspeople coming into the US notice the strong dollar right away. Forbes MacLean of Nova Scotia, in New York for a trade show, says US goods are 50 percent more expensive than Canadian. "We really notice it when we come to New York, where everything is expensive anyway," Mr. MacLean says.

At the Light Fair, a lighting trade show, exhibitors say the strong dollar has brought in some new companies, particularly from Asia. But right now it's not really hurting the US companies, since there is enough business for everyone. Says Dan Buckley, a sales representative from Farmingdale, N.Y., "Business is good, real good."

(c) Copyright 2000. The Christian Science Publishing Society