Strong silence from U.S. on dollar’s weakness

Strong silence from U.S. on dollar’s weakness

Herald Tribune
October 10, 2007

The U.S. dollar is slumping near all-time lows against the euro and has weakened considerably against several other major currencies, but officials in Washington are reacting with almost contented silence.

Less than two weeks before finance ministers from the Group of Seven industrialized countries meet to discuss economic policy, European officials are grumbling about the weakened dollar because it makes U.S. exports cheaper in world markets.

Jean Claude Trichet, president of the European Central Bank, reiterated Monday that he was paying “great attention” – a week ago he spoke of his “extreme attention” – to U.S. statements in support of a “strong dollar.”

But while the official mantra of the Bush administration remains that a “strong dollar is in our nation’s interest,” this formulation has not changed during the past five years as the dollar gradually lost about a third of its value against the euro.

On Wednesday, the dollar was trading at about 1.408 against the euro – slightly off its all-time low earlier this month. In January 2002, the dollar was worth about 0.89 per euro.

Indeed, when the dollar’s slide accelerated after the U.S. Federal Reserve Baord lowered interest rates on Sept. 18, U.S. officials barely even repeated the mantra.

“They don’t really care what the dollar does, at least within a fairly wide range,” said Adam Posen, deputy director of the Peterson Institute for International Economics in Washington. “What the U.S. government cares about above all is that the changes are orderly.”

Since the most recent decline began three weeks ago, the U.S. Treasury secretary, Henry Paulson, has mentioned the strong dollar only once.

That was on Sept. 21, during a trip to Canada, just as the U.S. dollar was dropping to parity against the Canadian dollar for the first time in three decades.

“I feel very strongly that a strong dollar is in our nation’s interest,” Paulson said back then, “and we believe that currency values should be set in a competitive marketplace based on underlying economic fundamentals.”

In practice, analysts said, the administration’s position has been, effectively, that a “strong” dollar is whatever value the foreign-exchange markets settle on.

By contrast, Paulson has repeatedly expressed satisfaction that U.S. exports have climbed by about 15 percent over the past year – a trend that has been helped by the weaker dollar.

Analysts see little mystery in the U.S. position: At the moment, a weaker dollar offers more benefits than a stronger one.

The cheaper dollar offers a lift to American exporters by making their products more competitive in many parts of the world. And while a weak dollar usually makes imports more expensive, import prices have climbed far less than the other currencies so far because foreign producers have kept prices low in order to preserve market share in the United States.

“Implicitly, Paulson and the Federal Reserve are happy with a gradual fall in the value of the dollar,” said Nouriel Roubini, an economist at New York University and president of Roubini Global Economics, a consulting firm that also operates a popular economics Web site. “They’ll never say they favor a weak dollar, but the benefits to the U.S. in terms of competitiveness are significant.”

Though Paulson has primary responsibility for U.S. exchange-rate policy, officials at the Fed have also made it clear that they are not worried about any imminent inflationary dangers posed by a weaker dollar.

The Fed chairman, Ben Bernanke, recently told a congressional hearing that the dollar’s value remains “strong” in other respects.

“The value of the currency can also be expressed in terms of what it can buy in domestic goods, the domestic inflation rate,” Bernanke said in response to questions about the dollar from Representative Ron Paul, a Republican of Texas, a long-shot candidate for the Republican presidential nomination. Noting that inflation remains low, Bernanke suggested that the dollar’s weakness was not a source of concern to the Fed.

Democratic lawmakers, who have been quick to attack the Bush administration about most other economic policies, have said almost nothing at all about the currency’s decline.

To at least some European officials, worried that the soaring value of the euro will hurt European exports, the U.S. silence has been thunderous.

“I would like very much to hear U.S. Treasury Secretary Henry Paulson repeat loud and clear that a strong dollar is good for the American economy,” said Christine Lagarde, the French finance minister, in an interview last week with the French business newspaper Les Échos.

Paulson has yet to respond. Left with his taciturnity, European officials have resorted to reminding Paulson about the one statement he did make.

“We agree with Mr. Paulson,” said Miguel Ángel Fernández Ordóñez, the governor of the Bank of Spain and a member of the European Central Bank board, after a meeting Monday in Luxembourg.

Yet even as European and U.S. officials warily circle each other on the currency, a bigger issue for both the United States and Europe is China, which continues to tether its currency, the yuan, closely to the dollar even as the Chinese trade surplus swells further.

According to recent data, the Chinese foreign reserves have been climbing at the pace of $40 billion a month – twice as fast as last year.

In recent days, European officials like Trichet have begun to focus more on demands that China allow its currency to float more flexibly.

That would be in line with long-standing efforts by the United States. But thus far, those efforts have had very limited effect on Chinese policy.

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