Rhetoric gives way to reality in US dollar policy

WASHINGTON: The Bush administration has in the past few days exposed the strong dollar policy for what it is: a rhetorical magic trick. 

It is markets, not government, that should dictate a currency’s fate, according to Treasury Secretary John Snow, so variations on the phrase “we favour a strong dollar” – coined in the Clinton administration – have little practical import. 

“There’s no conscious policy on the part of the United States, I want to assure you, to move the dollar at all,” Snow told the a House of Representatives panel on Tuesday, the same day he was quoted in an interview as saying government intervention in currency markets should be kept to a minimum. 

Given the greenback’s slide of roughly 20% versus the euro in the past 12 months, Snow’s recent dollar comments have convinced financial markets that the administration is at least tolerant of the fall while preserving some deniability. 

“The Treasury Secretary said the policy exactly as it is,” White House spokesman Ari Fleischer insisted on Wednesday. “The United States continues to support a strong dollar.” 

Analysts say some of the speculation about a currency shift is contrived by market participants who stand to profit from movements in the dollar, while some may reflect confusion about what a strong dollar policy entails. 

The policy’s roots lie in the 1990s, when Clinton-era Treasury chief Robert Rubin honed the mantra that “a strong dollar is in the US national interest” to the point of caricature among those who heard it over and over. Even then, it did not prevent Rubin – regarded as a master of economic rhetoric – from making a modification in early 1997, by adding “the dollar has been strong for some time now” when he wanted to rein in its appreciation. 

In the 1990s, the US was enjoying its greatest peacetime boom, far different from today’s crawling expansion that Snow has called “soggy”. 

Analysts say Rubin’s policy was a reflection of 1990s reality while Snow is facing up to facts now by insisting that a currency’s value can only be determined by markets. 

Robert Hormats, the vice-chairman of Goldman Sachs International in New York, said Snow’s prescription for dealing with currency was really no different from Rubin’s in that both said a currency’s fate was determined by economic conditions. 

“He (Rubin) was for a strong dollar when the economy was strong,” Hormats said. “I don’t think he would resist its weakness now. He probably wouldn’t say very much.” 

According to Hormats, the Bush administration faces a dilemma: while a cheaper dollar would be a welcome stimulus for a flagging economy, to say so out loud carries hefty risks. 

“It clearly would like to see a gradual lowering of the dollar because that would be helpful for boosting exports,” Hormats said. “But they can’t say that directly because of the risk the dollar could drop too dramatically and that would hurt the bond market (and push up long-term interest rates).” 

A weaker dollar would help the battered US manufacturing sector and could provide a needed buffer against deflation dangers. Ultimately, it would also help narrow the record US trade deficit. – Reuters  

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