Word: dollarization
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Dates: during 1980-1989
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...very least, the dollar's overvaluation is responsible for half the trade deficit, and some estimates put the dollar's contribution (if that is the word) considerably higher. By the same token, Rimmer de Vries, a senior vice president of Morgan Guaranty Trust Co., figures that if the dollar's exchange rate could be reduced to roughly 200 yen and 2.4 deutsch marks (vs. 221 yen and 2.7 marks last week), with comparable drops against other major currencies, the U.S. trade deficit might eventually be whacked all the way back down to $50 billion...
That would crimp foreign earnings on sales in the U.S., of course, but Japan and the European powers nonetheless have strong incentives to join the devaluation drive. Most important, the strength of the dollar drains investment capital out of their countries and forces them to keep interest rates higher than they would like them to be to prevent still more money from fleeing to the U.S. A lower price for the dollar might enable them to reduce domestic interest rates and thus speed up their internal economies. And if sales to the U.S. fall? Well, the unattractive alternative is protectionist...
...time looked right last week to begin a devaluation campaign. At its peak in February, the dollar was selling at a far higher price than could be justified by any calculation of economic growth and inflation rates. A slow and irregular decline set in. Money traders, who were already debating how much further the dollar might fall and how fast, pounced on last Sunday's five-government announcement as a signal to start selling greenbacks immediately. In New York some traders came to work at 10 p.m. Sunday to be on hand for the opening of the Hong Kong...
Even so, the devaluation campaign is a gamble. There is some danger that it might be too successful, setting off a stampede from the dollar that would damage the U.S. In effect, Washington is relying on foreign buyers of Treasury bills and bonds to finance the U.S. budget deficit. Abrupt withdrawal of that capital could force the Government either to borrow more in domestic markets, bringing about a disastrous rise in interest rates, or to indulge in a highly inflationary expansion of the money supply...
Most financial experts in the U.S. and overseas, however, are more wary of the opposite danger: the devaluation drive could fizzle out. The maximum amounts of dollars that the five governments could sell would be insufficient to move the markets much in the long run unless they were supplemented by heavy sales on the part of money traders acting for private-investor clients. And traders are unlikely to make those sales unless they can be convinced that the five governments will back their dollar sales with fundamental changes in economic policy: measures by the European countries and Japan to speed...