83. Letter From the Under Secretary of State for Economic Affairs (Cooper) to Vice President Mondale1


  • Recent Movements of the Dollar in Foreign Markets

In recent weeks the dollar has fallen noticeably against major foreign currencies, as the probable outcome of the U.S. energy policy debate has been deteriorating daily. The major factor affecting the dollar is the present and prospective deficit in the current account of the balance of payments, running at a rate of $17.5 billion in the first half of 1977 and expected to worsen in 1978. The current deficit is as large as it is because of a more vigorous economic recovery here than abroad and because of the rapid growth in our dependence on imported oil.

Between November 30 and December 13, the dollar fell an average of 1.1 percent against the currencies of our trading partners. The downward movement has been erratic rather than continuous, with brief periods of recovery. These movements carry the Japanese yen and the German mark further along the paths of appreciation they have been following since September.

A longer view of exchange rate movements shows that since March 1973 (when currencies began to float against one another on a general basis) the dollar has appreciated on all the various measures that we use, by amounts varying from 1 percent (against the SDR) to 10 percent (against a bundle of 46 currencies weighted by their importance in U.S. trade). Since the beginning of 1977, the dollar has appreciated by 0.9 percent on the measure most relevant to the U.S. but it has depreciated by about 3 percent against the SDR—the main difference being the greater importance of depreciating currencies of less developed countries in the trade-weighted index than in the SDR. These changes are negligible.

The recent appreciations of the German mark and of the Japanese yen are rightly alarming to Germany and to Japan. But they can avoid such currency appreciations by expanding their domestic economies more rapidly, and in the case of Japan by taking steps to encourage more imports (the real pressure on Japan in their current discussions [Page 258] with us is the appreciation of the yen, which is largely a consequence of their own policies).

You are right to be concerned about the possible impact of currency movements on OPEC oil pricing decisions, and that is our chief concern with the relatively modest depreciation of the dollar in recent weeks. An index of exchange rate changes weighted by OPEC trade shows a depreciation of the dollar by about 3½ percent between January and the end of October. This will be used by the price hawks as an argument for increasing the dollar price. An inhibiting factor is that OPEC assets are denominated mainly in dollars, and the leading OPEC countries will not want to take steps that reduce the real value of their own assets. But there is no doubt that depreciation of the dollar in these weeks immediately before an OPEC pricing decision is awkward.2

SDR U.S. Trade-Weighted Currencies OPEC Trade-Weighted Currencies
Mar. 20, 1973–Nov. 30, 1977 +1.9 +11.3 +3.03
Dec. 30, 1976–Nov. 30, 1977 −1.8 +1.8 −3.5*
Nov. 30, 1977–Dec. 13, 1977 −1.3 −1.1
  1. Source: Carter Library, Papers of Walter F. Mondale, National Security Issues, Box 82, National Security Issues—Economic (2/5/1977–8/14/1977). No classification marking. Forwarded to Mondale under cover of a December 16 memorandum from Clift; a note on Clift’s memorandum reads: “The V.P. has seen.” (Ibid.)
  2. An OPEC Summit conference took place in Caracas December 20–21. At its conclusion, a 6-month freeze on oil prices was announced.
  3. *To Oct. 1977