European Stars And Stripes (Newspaper) - November 15, 1987, Darmstadt, Hesse                                Liar what s behind the currency plunge Page in the stars and stripes by Tom Raum associated press As National policy makers shifted gears from defending the Dollar to avoid inflation to defending economic growth to avoid a recession the . Currency packed up and headed South. In recent weeks the Dollar hat fallen to new Post work War ii lows against the japanese yen and the West German Mark dearly bad news or american tourists abroad and for trading partners with Export driven economies a falling Dollar erodes americans purchasing Powers and can Lead to a lower Standard of living. But ii can also help ease the . Trade deficit. And if accompanied by lower interest Rales it can stimulate business growth. While . Allies sought furiously for ways to restore Exchange rate stability . Manufacturers were taking heart. The Dollar s fall was showing Clear signs of once again making their products More competitive on world markets. Is the ailing Dollar Good or bad Lor americans Tho answer economists suggest is Well it All depends. Here Are some of the major issues surrounding he Dollar s recent gyrations largely brought on by the Slock Market collapse. Q. Who determines the Exchange rate value of the Dollar a. Until 1971, los value was rigidly set. Lisl Loa certain weigh of Gold and later to Exchange rates of other major nations currencies. Bui since then los Price has floated determined by Market forces. Each Day hundreds of Btu Lions of dollars Are bought and sold by traders in foreign Exchange markets these traders Are usually commercial Banks or other Large institutional buyers but can also be Central Banks like the Federal Reserve or the Bank of Japan. A How did the Stock Market collapse in the United slates and in other Industrial nations affect the Dollar a. For the first Lew Days there was Lille noticeable ailed. However As markets continued to decline investor Confidence in the . Economy and the Dollar and in Dollar denominated securities was shaken. That triggered massive sales of dollars on foreign Exchange markets much of those sales Stem Ped from fears by traders thai the Dollar would All even further especially Wilh the fed increasing the Supply of dollars daily by pumping new Cash or liquidity into the nation s financial system to avoid a banking crisis. Q. What makes a Dollar Strong or weak a. Trie Dollar is subject to the same Laws of. Supply and demand As farm products stocks and other goods and commodities which Are traded openly. Heavy buying of dollars on Exchange markets drives up its Price making it Strong compared to other currencies. A sell Oil of dollars sends the Price Down making ii  when foreign investors put their Money in Dollar denominated securities like . Treasury Bonds that also helps to keep the Dollar  when they pull out of these investments that helps to weaken in o. So what s better a Strong Dollar or a weak Dollar a it depends. A Strong Dollar makes americans Cash go further overseas and cheapens he Price of imports generally Good for . Consumers and for foreign manufacturers. If the Dollar is overvalued As nearly Al economists agree it was in the Early 1980s, . Products Are harder to sen both abroad and Al Home where they compels with Low Cost imports. Thai helped give the United states its record breaking Trade deficit forcing layoffs in import Ballero . Manufacturing industries. A weak Dollar can restore competitiveness to american products by making foreign goods comparatively More expensive narrowing the Trade deficit. But Loo weak a Dollar besides bringing havoc to Export driven economies like Hose of Japan end West Germany can spawn inflation first through higher import prices and sunday november 15,1987 then through spiralling prices for All goods. Even worse a tailing Dollar can drive foreign investors away irom . Securities which lose value along with the Dollar. Foreign investment is critically needed to help finance the Large . Budget deficit. The usual Medicine for Loo weak a Dollar is higher Domestic intercut rates. Of Why did the Umed Stales let the Dollar fall in the aftermath of the Stock Market crash a. It had Lille Choice because the collapse in financial markets raised the spectre of a new recession. The traditional Way of propping up the Dollar raising interest rates could Hasle such a recession by clamping Down on economic growth. The administration and the Federal Reserve changed course deciding to lower not raise interest rates to protect economic growth. Inflation fears associated with a weaker Dollar once in the forefront receded to a lower priority with these new prospects of a recession q. Until recently Why was tha administration trying to prop up the Dollar when a lower Dollar could help the Trade Delill a. The Reagan administration until Early 1937 actually promoted a weaker Dollar to help balance Trade accounts. But in february it agreed Hal further Falls in the Dollar could Lead to renewed inflation. It joined its trading partners in the louvre Accord to try to hold the Dollar steady around current  q. If the Dollar s value is solely set by Market forces what Steps can governments Lake to stabilize it a through two Basic ways Exchange Markel intervention and by coordinating interest Rale changes. Q. How does intervention work a. Intervention is the direct buying or Belling of currencies by Central Banks on foreign Exchange markets. If the purchases Are Large enough that can influence prices directly. When the fed or the Bank of Japan or the wast Gorman Bundesbank buys dollars directly that reduces the Supply of dollars available and sends up the Price. Massive intervention by the Bank of Japan recently kept the Dollar from falling further than in