Sayonara, Strong-Dollar Policy

May 9, 2003
By Javier David

NEW YORK (Reuters) - Sayonara, strong-dollar policy. And if you ask most market observers, Godspeed.

One recession, two wars and four U.S. Treasury secretaries after it was instituted under the Clinton Administration, the U.S. currency's armor plating appears to have ruptured. The dollar has tumbled to 4-year lows against a broadly stronger euro(EUR=) and the Swiss franc (CHF=) while barely staying afloat against other major currencies.

ADVERTISEMENTAn interesting aspect of the dollar's swift reversal is the seeming nonchalance shown by the Bush Administration, analysts say. As a result, traders pay little heed whenever U.S. officials swear fealty to the strong dollar policy.

"The strong-dollar policy seems like a strong-dollar policy, 'nudge-nudge, wink-wink,"' quipped David Mozina, director of global foreign exchange research at Bank of America in New York. However, "from a policy perspective and looking at the imbalances in the U.S., it's welcomed."

In the market's view, the policy created by former Treasury Secretary Robert Rubin and ostensibly continued by his successors ceased to exist the moment George W. Bush moved into the Oval Office.

"I think it is dead. If it's not dead, it's crippled," said Lara Rhame, U.S. economist at Brown Brothers Harriman in New York. "Ever since the Bush Administration came into office, they've been giving their tacit acceptance of a weaker dollar."

She noted a CNBC interview with Treasury Secretary John Snow earlier this week in which he advocated a strong dollar in principle but added the caveat that its value was "best determined in an open, competitive currency market."

Within 24 hours, the White House echoed Snow's comments.

On Friday, Snow reiterated that he favors a strong dollar, but said the Treasury has no target for the currency.

The struggling U.S. economy faces numerous risks. Chief among them are falling prices, the U.S. current account deficit at record highs and a manufacturing sector in decline.

As such, Rhame -- like many other analysts -- suspects U.S. officials are secretly cheering for a weaker dollar to help the economy.

"All the Treasury is looking for at this point is a controlled dollar decline," she said. "At the margin it's positive for the economy and ... it's sort of a cost-free way for the administration to give small relief to manufacturers and exporters, and help on price deflation."

The dollar has declined more than 8 percent since the start of the year (=USD) on a trade-weighted basis against the currencies of U.S. trading partners, and is more than 21 percent below a 20-year high reached in July 2001.

U.S. GAIN, OTHERS' PAIN

Since the dollar began its downtrend more than a year ago, U.S. policy-makers have spoken out about its value only when asked by reporters. This has just increased the market's feeling that official jawboning rings hollow.

Mozina said numerous U.S. corporations have reported higher earnings recently because the cheaper dollar made their goods more competitive in foreign markets.

But one currency's weakness is another's strength, and that is causing pain for continental Europe and Japan, in particular.

On Thursday, European Central Bank President Wim Duisenberg indicated he was not troubled by the euro's current levels. But German companies have begun to voice concerns about the single currency's gains.

Meanwhile, Japan is waging an uphill battle to keep the yen weak against the dollar. Although the euro has soared to a 4-year high against the Japanese currency, the yen climbed on Wednesday to a 10-month high versus the dollar.

Analysts view the dollar's fall as orderly, but say a quick and calamitous slide may wreak havoc in financial markets and could yet spark concern in Washington.

"When is the dollar's decline a problem for the likes of Snow and the White House? When it is disorderly," said David Gilmore, partner at Foreign Exchange Analytics, in an e-mail to clients this week.

"When is it disorderly? When the decline in the dollar is on the front page of The New York Times, Washington Post and Wall Street Journal, U.S. equity and bond markets are selling off and investors and traders are blaming the weak dollar," he said.

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