The US has a strong-dollar policy. The US dollar is weak. Ergo US dollar policy isn’t working or is a fiction.
Why can’t folks put two and two together? Instead of questioning the nature or efficacy of the strong-dollar policy, they comb pronouncements that spring from the mouths of treasury secretaries for any nuanced shift.
Ever since Bob Rubin coined the mantra that a strong dollar is in the best interest of the US, candidates for the administration’s top economic job are groomed to reiterate the phrase at the slightest provocation. Paul O’Neill, President George W. Bush’s first treasury secretary, was so bold as to suggest the foreign exchange value of the dollar was determined by the market and was summarily given 50 lashes.
Last week, treasury secretary Hank Paulson threw the dollar a life preserver as it was hovering near record lows against a basket of major currencies. “We have very much a strong-dollar policy; that’s in our nation’s interests,” he said. Paulson, travelling in South Africa, went on to say, “Our economy, like any other, has its ups and downs, and its long-term strength will be reflected in our currency markets.”
Tone deaf as I am in the matter of dollar policy, I rely on the insights of others. I learned that Paulson’s statement represented a “significant change in rhetoric,” according to Peter Kenen, adjunct senior fellow at the Council on Foreign Relations and professor emeritus at Princeton University.
Kenen, quoted in the 17 November edition of The Wall Street Journal, said Paulson’s comments are a hint he is looking to “an end to the depreciation and perhaps a turnaround of the dollar.” (It takes a certain expertise in international economics to be able to draw such inferences.)
For the record, the US hasn’t had a dollar policy—strong, weak or otherwise—since Richard Nixon closed the gold window in 1971. Running the bureau of engraving and printing (BEP) (treasury’s job) has nothing to do with the supply of dollars. The BEP produces billions of federal reserve notes each year, but the Fed determines the amount of bank reserves and currency in circulation, the raw material for the money supply.
At best, repeating the dollar mantra can affect the short-term demand for dollars. If traders with large short positions expect the treasury to back its words with action, instructing the Fed to buy dollars in the foreign exchange market on its behalf, they might choose to reduce their exposure and cover their shorts. Once the intervention passes, however, speculators typically go right back to selling dollars.
Interest rate medicine
If the Fed bought dollars on behalf of the treasury and that was that, then the supply of dollars would be reduced and the price would rise. As it is, the Fed “sterilizes” the dollar purchases by buying government securities in the open market to maintain its Fed funds rate target.
The last time the US intervened in the currency market, it wasn’t to bolster the dollar. Instead, on 22 September 2000, the Fed sold dollars against the flailing euro.
Of course, it’s much easier to talk your currency down than talk it up, said Paul Kasriel, director of economic research at Northern Trust Co. in Chicago. That’s because weakening the dollar is associated “with the politically popular policy of lowering interest rates,” he said. “Propping up the currency would require the considerably less popular policy of raising interest rates.”
Right now the debate is between lowering the fed funds rate again (the financial futures market’s bet) or holding it steady (the message of official comments). Outside of some fringe elements, there’s no discussion of the Fed raising interest rates right now.
Do no harm
Relativity is important when it comes to foreign exchange values. That’s true for supply—dollars versus euros, let’s say—as well as demand. Since there is nothing the treasury can do about the supply of dollars in anything except the very short run (foreign exchange intervention), then all the treasury secretary can do is try to influence demand.
At a minimum, the treasury doesn’t want to give foreign central banks and international investors “reasons for diversifying away from the dollar,” said Lou Crandall, chief economist at Wrightson Icap Llc. in Jersey City, New Jersey.
“Paulson is painted in the same corner” as every post-Rubin treasury secretary, he said. “He doesn’t want to say anything that might encourage or accelerate a depreciation in the dollar.”
So why was Rubin able to talk the dollar up from an historic low of 79.75 yen in April 1995? “The dollar was going up because of market forces,” Kasriel said. “Everyone said it was the strong-dollar policy. The treasury secretary really has very little power.”
He doesn’t control interest rates. The power of the purse belongs to the Congress. He gets to travel, rub shoulders with his counterparts overseas and attend cabinet meetings.
Somehow, the job hasn’t seemed quite so glamorous, or the dollar’s value so easy to fashion, since Rubin left treasury in 1999. His successors repeat the mantra, but it just isn’t the same. So how about it? I know you’ve got your hands full at Citigroup Inc. but maybe you could say it, Bobby. Say it once, for old times’ sake.
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