Treasury Secretary James Baker has roiled foreign exchange markets and riled foreign officials with his stated opinion that the dollar might have to fall further if other industrial countries do not stimulate their economies. The secretary is being surprisingly open in "talking down the dollar."

Those observers with more than a short memory will recall that one of his predecessors, W. Michael Blumenthal, was almost pillared for allegedly talking down the dollar in 1978. By comparison with Mr. Baker, Mr. Blumenthal's statements were innocuous. What this comparison demonstrates is that foreign exchange markets are less vulnerable to talk than was assumed in 1978. What was depressing the dollar, then as now, was not the rhetoric of secretaries of the Treasury, but fundamental forces - especially the large current account deficit of the United States.Hardly anyone has doubted that the dollar needed to come down from the highly appreciated level it reached in early 1985. Since then, the depreciation has carried the average value of the dollar about three-fourths of the way back to its level of 1980. The question is, does the dollar need to depreciate further?

The most reasonable basis on which to address this question is in terms of restoring a reasonable balance in the current account of the U.S. balance of payments. Given the reduction in the net international investment position of the United States and the consequent fall in net investment income as more interest is paid to foreign holders of U.S. securities, a larger merchandise trade surplus will henceforth be necessary for any desired current account position.

The U.S. current account was near balance in 1980. To restore a larger trade surplus than existed in 1980, it would follow that the real exchange rate of the dollar needs to move below where it was in 1980, yet, as noted, the nominal value of the dollar, on a trade-weighted average basis, is still above the 1980 level.

When nominal exchange rates are converted to inflation-adjusted, or real, exchange rates, the dollar turns out to be even further above its 1980 level.

If we look at the dollar relative to individual currencies, we find that its inflation-adjusted value in terms of the German deutsche mark is still about one-fourth above where it was in 1980. Relative to the yen, the value of the dollar has moved to all-time low, about 25 percent below the 1980 level.

There are good reasons for the yen to appreciate more than other currencies relative to the dollar. For one thing, Japan's current-account surplus is larger, as a proportion of gross national product, than that of West Germany and most other countries. However, Japan's surplus has been held down by "voluntary" export restraints that it would be desirable to eliminate. These restraints have to a degree substituted for a more appreciated yen.

In relation to industrial-country currencies other than the yen, the

dollar's real value is still above the 1980 level. Yet, much of the decline of the U.S. current account deficit will have to be reflected in a move the other way in the current account positions of industrial countries. In contrast to what happened when the dollar depreciated in the 1970s, it cannot be expected now that developing countries will increase their imports strongly. They are too burdened with debt for that.

All in all, it appears that the dollar should depreciate further if the objective of the depreciation - restoring balance to the U.S. international accounts - is to be achieved. Secretary Baker's political initiative is supported by economic reasoning.

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