Dollar Diplomacy

Report Outline
Special Focus

Overview

For the moment, at least, the Paris agreement by six of the world's major industrial power to stabilize exchange rates seems to be working. Since the Feb. 22 meeting in Paris, the dollar has held steady against the Japanese yen and the West German mark, the world's other two most frequently traded currencies, indicating that foreign exchange markets have taken the pact seriously.

The agreement to halt the dollar's plunge came just two years after it reached a peak, at a time when the soaring greenback allowed Americans to see the world on the cheap and develop a taste for luxury imports. But what was good for American consumers was not beneficial for U.S. industry. In early 1985, as the dollar was at its peak, sales of imported cars rose 15 percent in this country, where dollars went further in the purchase of foreign goods because of the American currency's appreciation. But meanwhile, U.S. products languished on foreign markets, where it took more yen, marks and other currencies to buy American.

In early 1985, when Treasury Secretary James A. Baker III undertook the task of reversing the dollar's upward course, and America's trading fortunes, he faced stiff opposition. Even among allies, one country's strong currency is another's ticket to greater prosperity and not something to be given up without a struggle. Seen from Japan and West Germany, the strong dollar was a godsend, allowing their export industries to capture a bigger market share from American producers.