U.S. Dollar: On the Path to Further Weakness
18-Dec-02 08:56 ET
Despite the Bush Administration's insistence that they are maintaining their strong U.S. Dollar policy we think what's actually going on behind the scenes is contrary to this statement and could, in fact, help to push the greenback lower. But before you panic, this isn't such a bad thing.
Politics
Paul O'Neill and Larry Lindsay were two of the bigger advocates for the strong Dollar policy in Washington. Right now they'll just be two more additions to this week's claims data. With the nominations of John Snow and Steve Friedman for Secretary of the Treasury and Chief Economic Advisor, respectively, President Bush made it clear that he wanted a change.
We believe the unwavering support for a strong Dollar is a part of that change. This isn't to say that they're going to go on an intervention spree trying to drive a stake through the Dollar's heart. They just won't do anything to drive it up. And in this market, with negative sentiment spurred by geopolitical and growth fears, that removes a pillar of support from the currency which makes it a little more vulnerable.
We think it's unlikely that even if the Administration were watering at the mouth for a weaker Dollar that they would say it in so many words. Your President tells you he wants a weak Dollar and chances are the general public sees it as throwing in some sort of towel.
With Republican poster-boy Trent Lott giving the Republican leadership a headache, it's unlikely they're willing to go out and try to explain something that has a very good chance of hurting public opinion/approval polls. Though it makes perfect sense from the standpoint of helping out exporters and reducing the current account deficit, it may serve to dampen public confidence. That's the last thing this Administration wants at this point in time - a self-inflicted confidence/approval crisis.
There are a couple of compelling reasons why the Dollar could stand to have a little more steam taken out of it.
Exporters
A weaker Dollar would be beneficial to the exporting sector of the economy (ok - it's small, but it's still there). The Dollar weakens and their (companies like Ford, General Motors, John Deere, Caterpillar, etc…) products become more attractive to foreign buyers. This creates more demand for their products and could spur these companies to spend - on people, on parts, doesn't matter. We'll take business spending any way we can get it.
Reports suggest that U.S. manufacturers say that the strong/overvalued Dollar cost them two million jobs. Ok, we're not crazy enough to believe that all the job losses were due to the strong Dollar but they were lost nonetheless. Jobs are exactly what this economy needs right now. Sure, we're a service economy, but if a weaker Dollar can revive just half of that job number it would be a boon in these uncertain times.
Current Account Balance
The current account deficit is another reason to ease the greenback. Right now, the U.S. must attract 80% of the world's capital to maintain its value. Though off its wides, the current account deficit stands at -$127.0bln. The way we attract capital is to make our assets desirable to foreign investors. With the markets remaining fragile, that becomes harder and harder to do.
Foreign ownership of U.S. financial instruments has risen steadily for the past several years. That's obviously how we got such a huge current account deficit in the first place. If these owners grow weary of waiting for U.S. stocks to charge higher without looking back then we could have a problem.
Though we put a relatively low probability on foreign investors commencing a wholesale selling program of Dollar-denominated assets (they'd be giving up way too much liquidity), the risk is worth keeping on the radar screen. They certainly don't have to dump all of their U.S. assets to pressure the currency. A small fraction would weigh on it in this environment.
Bottom line: the Dollar can, and probably should, continue its slide from current levels but it won't necessarily be disastrous for the economy. We think that if a weaker currency can generate some marginal job growth and alleviate some of the pressure that the current account deficit has put on economic growth then the stock market could even be persuaded to see this as a positive.
It's impossible to quantify where the meeting point is but we don't think it's a pipedream to think it's possible for medium-term Dollar weakness to benefit the economy and in turn spur an eventual stock rally. With no imminent fears on the inflation front there's not much standing in the way.
Kristin Foley |
