Path: bloom-picayune.mit.edu!snorkelwacker.mit.edu!news.media.mit.edu!americast.com!americast.com!usa-post Newsgroups: usa-today.bonus,americast.usa-today.bonus From: usa-post@AmeriCast.Com Organization: American Cybercasting Approved: usa-post@AmeriCast.com Subject: bonus Tue, Aug 25 1992 Date: Tue, 25 Aug 92 04:24:46 EDT Message-ID: 08-25 0000 BONUS: Dropping dollar bruises Bush USA TODAY Update Aug. 25, 1992 Source: USA TODAY:Gannett National Information Network If President Bush looks worried right now, it may be because his re-election chances depend on winning the approval of two very different constituencies: The voters and the global financial markets. Right now, neither group is very pleased with him. His worst problem: The plummeting dollar. WHY DID THE DOLLAR FALL? Bush's promise at the Republican convention to seek tax cuts if he's re-elected rattled overseas investors. They sent the dollar into a free fall on international markets Friday. The slide continued Monday, with the dollar hitting another all-time low against the German mark since the modern mark was created after World War II. One reason: Investors around the world are worried about the federal government's will - or ability - to cut its enormous budget deficit, currently running at $330 billion a year. WHY DOES THEIR WARINESS AFFECT THE DOLLAR? That pessimism is making them less likely to buy U.S. stocks and bonds, and thus less likely to want U.S. dollars. Though Bush also promised to seek spending reductions, talk of tax cuts is the last thing investors want to hear. "It reminds them that this country is still running an irresponsible fiscal policy," says David Jones, economist for Aubrey G. Lanston, a Wall Street brokerage. WHAT MUST BUSH DO? With his job approval ratings near rock bottom and despite his recent bounce in opinion polls, Bush badly needs to show voters he has a plan to boost the sluggish economy. Or, as conservative columnist Robert Novak bluntly puts it: "He's got to put something in their pockets." But Bush's own pockets may be bare. That's because the dollar's slide is threatening to undermine the stock and bond markets, which have already fallen sharply. HOW DID THE DOW DO? The Dow Jones industrial average slid 51 points Friday and another 26 points Monday. Yields on U.S. Treasury bonds, which have been falling all summer, have abruptly reversed course. The yield on the benchmark 30-year bond has risen to 7.44%, from 7.32% Thursday. That's not good news for the economy. Low interest rates are one of the few things the economy has going for it right now. WHAT IS AT THE BOTTOM OF THE FALL? The root of the problem: While U.S. short-term rates are now quite low, European rates are high, thanks to efforts by the German version of the Federal Reserve, the Bundesbank, to control inflation pressures spawned by German reunification. Many global investors have been moving cash from the USA to Germany to reap the higher yields. Three-month German government treasury bills yield 10.1% vs. 3.2% on U.S. three-month Treasury bills. Ten-year german treasury bonds yield 7.9% vs. 6.7% on 10-year U.S. Treasury bonds. WHAT DID BANKS TRY TO DO? To buy German securities, investors have been selling dollars and buying marks, and that's been hammering the dollar down for more than a year. All that may not sound like much of a campaign issue. But it could become one quickly. On both Friday and Monday, the Fed, the Bundesbank and the world's other central banks tried to stop the dollar's fall by entering the market to buy dollars and sell other currencies. They failed - a rarity in the financial markets and a warning sign of the severe pressure on the dollar. WHAT DOES CLINTON SAY? Democrat challenger Bill Clinton says the falling dollar shows how little the markets think of Bush's plan to resuscitate the economy. But Clinton hasn't offered any suggestions about how the dollar's slide could be stopped. If the dollar keeps dropping, Federal Reserve chairman Alan Greenspan could face an ugly choice. He'll have to decide whether to let the dollar go, and risk a currency crisis, or defend the dollar by raising short-term interest rates. HOW WOULD A RATE HIKE HELP THE DOLLAR? A Fed rate hike would lure cash back from Europe, easing pressure on the dollar. But with the USA already mired in the slowest recovery since World War II, it could plunge the economy back into recession. And that could cost Bush the election. Maybe worse, in Wall Street's view, higher rates almost certainly would trigger a deeper sell-off in the U.S. stock market, which has been boosted by the Fed's aggressive rate cuts the past nine months. WILL THE FED RAISE RATES? Rising interest rates, a plunging stock market and a global currency crisis - just what the President doesn't need at this stage in his underdog re-election campaign. Fortunately for Bush, experts rule out a Fed rate hike. "Will Greenspan raise rates to defend the dollar? Not a chance," says Lincoln Anderson, an economic analyst for Fidelity Investments. WHAT DOES BUSH WANT? Some Wall Street analysts suspect the President wants the dollar to keep falling. A lower dollar boosts U.S. exports by making them cheaper overseas. Export growth has been one of the economy's strong points the past few years. Analysts have speculated that Bush may hope export growth will give the economy at least a bit of a push before the election. WHAT DO THE EXPERTS THINK? But most experts find it hard to believe a U.S. president would willfully destabilize the U.S. currency - and the international economy - to win an election. "That would be completely irresponsible," says David Calleo, a professor at John Hopkins University, and an expert on the international currency system. And it probably wouldn't work. HOW ELSE CAN THE SLIDE HURT? Any export gains wouldn't be noticeable before the election. Also, the dollar's slide could hurt the economy by adding to the existing climate of uncertainty. "Without a stable dollar, it's difficult for corporations to make basic projections," says John Nelson, chief foreign exchange dealer for ABN-Amro Bank. There is another way to stop the slide: A decline in German interest rates would help stabilize the dollar by making German investments less attractive. WHAT ELSE WOULD SUCH A DECLINE DO? It would also boost the economies of the other major European countries that have currencies pegged to the German mark. But experts say a rate cut would be inflationary for Germany, and Germans have dreaded inflation since the days of hyper-inflation after World War I. Recent statements from Bundesbank officials suggest no rate cuts are coming. WHY IS IT WORSE FOR EUROPE? Other European countries may be forced to raise rates, or devalue their currencies relative to the mark. That's adding to global unease. "It's every country for itself now," says Aubrey G. Lanston's Jones. Most experts don't think a major financial crisis is in the offing. But they say the falling dollar will almost certainly drive down U.S. stock prices in days and weeks ahead. DOES THE DOW HAVE A FLOOR? "The correction will continue," says Allen Sinai, economist with the Boston Co. "But right now 3100 to 3150 is looking like the floor on the Dow." Some analysts say the falling dollar is a sign of a much larger problem: A breakdown in cooperation among the world's major economic powers, at a time when all are facing serious fiscal and monetary problems. WHAT COULD STRAINED RELATIONS DO? That, they warn, could turn the current slump into to a prolonged global recession, similiar to, if much milder than, the Great Depression of the 1930s. "We have gotten ourselves into quite a pickle," says Calleo. While that scenario may be too gloomy, most observers agree the falling dollar has put Bush in a tight corner. Says Jones: "He's caught, and there may be no way out." Bonus Editor: Beth Mann. (1-919-855-3491) Making copies of USA TODAY Update (Copyright, 1992) for further distribution violates federal law. This article is copyright 1992 Gannett News Service. Redistribution to other sites is not permitted except by arrangement with American Cybercasting Corporation. For more information, send-email to usa@AmeriCast.COM