Word: yen
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...rallies since the crash suddenly fizzled when the Government announced that the U.S. trade deficit had hit a record $17.6 billion in October, up 25% from September. The news threw the world's currency traders into a frenzy, and the dollar plummeted to its lowest levels against the Japanese yen and the West German mark since the 1940s. The turmoil could not help pushing urgent questions into the minds of every reader of the financial pages: What is going on with the U.S. economy, and what is going to happen in the new year...
...making American goods more competitive but also that propping up the currency would force the U.S. to keep interest rates too high just when a recession became possible. In the past month or so, the dollar has dropped 7% against the West German mark and 5% vs. the Japanese yen, which comes on top of an almost 40% fall during the past two years...
That, at least, is the theory. In practice, the mechanisms have been more complex and less effective. Since early 1985, the dollar has declined by about 50% against major currencies like the Japanese yen and the West German mark. Yet the U.S. trade deficit is as high as ever. Admittedly, it takes time for consumers and businesses to change their buying habits, and an improvement in the trade balance may be in the pipeline. But several forces are holding the deficit up. For one thing, foreign manufacturers have shown a dogged determination to hold down their U.S. prices to maintain...
...foreign, since U.S. manufacturers do not make the machines. Indeed, as long as the American appetite for imports remains, a perverse effect takes place: as the price of foreign products increases, Americans spend even more dollars for the same volume of goods. Meanwhile, they earn fewer yen, francs and marks for U.S. products that do sell well abroad, like Boeing aircraft and IBM computers. As a result, the trade deficit actually increases in dollar terms...
...contrast, countries with strong currencies have been able to boost their living standards. The mighty mark and yen have been putting a burden on West German and Japanese exporters, but they have responded by holding down costs and becoming more efficient. One reason they can do so is that many of their imported raw materials and components are priced in dollars and have become cheaper. With greater price stability, Japan and Germany face less pressure for wage increases. Despite the strong mark, Germany has become the world's leading exporter. Japan is openly contemptuous of the notion that...