The headline pretty much summed it up: “The coming decline of the dollar.” II columnist C. Fred Bergsten argued that the U.S. currency, having risen sharply over the previous three years, was poised to drop by 20 to 25 percent because of a growing current-account deficit. “The dollar is substantially overvalued,” he wrote, and its decline “could be quite steep as well as quite severe.” Subsequent events showed why currency forecasting can be a mug’s game: The dollar fell by more than 10 percent against the deutsche mark over the next two months, then steadied before rising more than 50 percent to a peak in February 1985. Bergsten was smart enough to point out that timing currency moves is fraught with uncertainty and that “confidence in Reaganomics” could support the dollar “far beyond any economic justification.” In fact, the Reagan administration’s tax cuts would spark an economic recovery the following year and help drive the dollar higher, only to have deficits undermine the currency after 1985 -- plus ça change. Bergsten also warned that the U.S. deficit with Japan would cause political tensions and fan protectionist pressures. Substitute China, and that warning would be just as valid today.
