Bush Administration May Prefer Weaker Dollar
By Kenneth N. Gilpin
The New York Times
Monday 19 May 2003
The dollar fell to its lowest level against the euro in four years today after Treasury Secretary John W. Snow seemed to suggest that the Bush administration would not be unhappy to see the American currency weaken further.
Mr. Snow said on Saturday that Washington no longer measured the dollar's strength by its market value against other leading currencies the long-accepted underpinning of what has been seen as a "strong dollar" policy.
Now, Mr. Snow indicated, the dollar's strength should be measured by the confidence it inspires in investors and its resistance to counterfeiting.
Mr. Snow made his remarks in Deauville, France, where he was attending a meeting of finance ministers from the Group of 8 industrialized countries.
The comments come during a period of dollar weakness that began more than a year ago.
After rising by about 47 percent on a trade-weighted basis against a basket of other major currencies from May 1995 through February 2002, the dollar has subsequently fallen by about 9 percent.
The euro, meanwhile, has risen about 36 percent against the dollar since February 2002.
Analysts said the Bush administration's decision to change its rhetoric about the dollar reflected an effort on the part of the White House to not only spur the economy through higher exports, but also to ward off deflationary pressures by importing higher-priced goods.
"The Washington consensus has reluctantly come to the conclusion that the risks of a deflationary endgame are a lot higher than they would like to concede publicly," said Stephen S. Roach, chief economist at Morgan Stanley.
"Congress, the White House and others have come to the conclusion that a strong dollar is no longer in the best interests of the United States," he said.
In New York this afternoon, the dollar was trading off its lows of the day against the euro, at $1.1662, versus $1.1578 late Friday. During trading in Asia, where the dollar fell sharply, the euro traded up as much as $1.1737, its highest level since Jan. 15, 1999, shortly after the European single currency was introduced.
Analysts and traders said further declines in the dollar are likely.
"We expect more of the same," said Yianos Kontopoulus, chief global foreign exchange strategist at Merrill Lynch & Company. "We estimate that about one-fourth, or possibly a bit more, of the correction against the euro has been completed."
America's huge and growing trade and current-account deficits have been sources of worry among economists for years. The only way to redress the imbalance, they said, was to have the dollar fall in value.
That approach has been resisted by many countries in Europe and Asia. A strong dollar has allowed those countries to continue to export goods to the United States, thereby sustaining global economic growth.
As long as the American economy was expanding vigorously and could act as the world's primary engine for economic growth, Washington could afford to abide by such a strategy.
Now, however, major economies around the world are in various degrees of trouble and the loose monetary and fiscal policies in the United States have so far failed to to resuscitate domestic production.
Mr. Roach, who has been a staunch advocate of a weaker dollar for some time, said he was pleased by what is happening.
"I like what is going on," he said. "The world is out of whack, and we need a shift in relative prices. If we can manage the dollar's decline along the way, this is what we need to rebalance growth. There is no painless way out, but this is the most appropriate course."
Robert Hormats, vice chairman of Goldman Sachs International, said the stimulative effects of a lower dollar would not contribute much unless other major industrialized countries take steps to offset a rise in the value of their currencies by adopting stimulative policies of their own.
"This dollar weakness is being viewed in other parts of the world as an attempt to export deflation," Mr. Hormats said in a telephone interview from Tokyo. "If those countries don't offset those pressures by stimulating their economies, then much of the trade benefit of a lower dollar will be wiped out."
Moreover, Mr. Hormats added, it is unlikely that a number of important Asian countries like China, whose currencies are pegged to the dollar, will allow the dollar to weaken very much.
In recent days and weeks, central banks across Asia, from the Bank of Japan to China's central bank, have intervened in currency markets to prop up the value of the dollar against their currencies.
"One of the reasons the dollar won't go down more against Asian currencies is that they are pinning their hopes of future growth on sales to the United States," Mr. Hormats said. "These countries can't afford to let their currencies appreciate that much."