Sliding Dollar Revives Ugly Memories of 1987

After two years of currency devaluations everywhere else, is it America’s turn?

The kingpin of global currencies, the U.S. dollar, has been sinking fast in recent weeks against the Japanese yen and the euro.

The dollar got a slight reprieve on Friday. It ended at 114.73 yen, up 0.43 yen from Thursday. The euro was unchanged at $1.076.

But in early July the dollar was worth 122.5 yen, and it took less than $1.03 to buy one euro.

The dollar’s losses so far have hardly been severe. Still, they are raising many old fears--not the least of which is that foreign money, which continues to finance much of our collective borrowing, might exit. A sinking dollar, after all, means the value of foreigners’ U.S. holdings are sinking as well.

The loss of foreign money could put even more upward pressure on U.S. interest rates. What’s more, a weak dollar threatens to raise inflation rates by making foreign goods more expensive.

Why should the dollar weaken? Blame the improving global economy. “As the world gets better, dollar-denominated assets should be expected to lose their unique attraction as the only safe haven,” notes Stephen Roach, economist at Morgan Stanley Dean Witter.

What spooks him are memories of late-summer 1987: Then, as now, the U.S. trade deficit was soaring. So was the stock market, to record highs. Once the dollar began to fall, foreign money got antsy, and interest rates had to go up, and up. That set the stage for the October 1987 stock market crash.

History doesn’t often follow the same script, but sometimes it can.