MONUMENT SECURITIES: The Dollar And Iraq
05 Mar 08:19
By Stephen Lewis
Of Monument Securities
LONDON (Dow Jones)--Mr Ivanov, the Russian foreign minister, yesterday
declared that, if necessary, his government would use its veto against a second
UN resolution on Iraq. His statement is likely to lead Anglo-American diplomacy
to revert to Plan B, a course that would obviate the necessity of Russia
casting its veto. This would involve issuing a direct challenge to Saddam
Hussein to disarm and, if he failed to do so, visiting upon Iraq the 'serious
consequences' stipulated under Resolution 1441. It is worth noting that markets
no longer harbour expectations that the Bush team can be diverted from war; Mr
Ivanov's stand gave no help to the US dollar or to equities. Subsequently,
indeed, the dollar softened after US Treasury Secretary Snow stated he was not
'particularly concerned' about recent declines in the dollar exchange rate.
Despite the US Treasury's later assertion that nothing had changed in foreign
exchange policy, Mr Snow's words seemed in conflict with his commitment to a
strong dollar as reiterated prior to last month's G7 meeting. As we have argued
before in these briefings, when members of the Bush team talk of a 'strong
dollar' they are, at most, expressing a preference; they are not stating an
objective.
As Mr Snow said yesterday, 'the dollar is in the marketplace and everything
in the marketplace goes up some and falls some'. In the sense that this is what
Mr O'Neill also believed, the US Treasury is entitled to claim that policy has
not changed. That is not to say that the timing of Mr Snow's remarks is without
significance.
Earlier in the day, the US Treasury Secretary had expressed his exasperation
at the failure of Europe and Japan to shoulder some of the burden of sustaining
global growth. The USA has significantly eased its fiscal and monetary policies
over the past two years but the growth generated by these means hasbeen shared
with the rest of the world through the mechanism of an overvalued dollar
exchange rate. Mr Snow's controversial language on the dollar serves notice
that the USA is not willing to tolerate indefinitely the continuation of this
state of affairs and that flexibility on the dollar is the channel through
which the US authorities could ensure that more of the growth their policies
are generating stays at home. The remarks also need to be seen in the setting
of the Iraq crisis. The USA's international critics are inclined to see the
dollar as the Achilles heel of the Bush Administration. Mr Snow was effectively
saying yesterday that the Bush team does not care about the dollar's fate as
keenly as the Franco-Russian alliance might suppose. It is prepared to
countenance a dip in the dollar, and the short-term damage that may inflict on
dollar-based markets, for the sake of its longer-term objectives. The point is
that a fall in the dollar would not be free of consequences for the euro zone.
It would tighten the screw on the zone's exports, pushing an already weak
economy further towards recession. Mr Clement, the German economy minister, has
warned today that it would become critical for German exports if the euro were
to rise above $1.10. A soft dollar would be far from strengthening the economic
underpinnings of the euro. The latter currency might be seriously vulnerable if
the USA were then to succeed, through military means, in reasserting its
hegemony in the oil-producing regions.
The analysis of the medium-term exchange rate outlook, and of economic
prospects more generally, is bedevilled by the fact that only the Bush team
knows what its war aims in Iraq really would be. The Royal Institute of
International Affairs (RIIA) has published a thought-provoking study of the
implications of an Iraq war. This paper concluded that 'once the war has been
won, the altruistic explanations for US involvement in Iraq will have to
compete with a US economy in possible recession and a US public very sensitive
to further casualties. The long-term, costly and ambitious reform of Iraq may
well be sacrificed to short-term electoral politics of the United States.' It
is important to consider whether this conclusion is likely to be correct. A
short US military campaign followed by a quick exit from Iraqi affairs has been
costed at less than $100bn. A long-term US engagement in Iraq after the war,
combining serious measures to reconstruct the economy and to develop its
resources, might absorb around $1,500bn. The difference between these two
figures is significant in relation to other global financial flows.
The RIIA may be taking a line from experience in Afghanistan in supposing
that the US Administration would soon abandon Iraq. But the war aim in the
Afghan theatre was punitive and linked to 9/11; any possible long-term US
interest lapsed when Caspian oil reserves turned out to be low-grade and much
smaller than expected. Iraq could be a different matter. The RIIA's paper
implicitly assumes that US motives are again punitive, if not personally
directed against one man. If US statements are taken at face value, however, it
would require a prolonged presence to ensure that Iraq were fully disarmed.
Furthermore, it seems unlikely that US leaders would be ready to sacrifice the
effectiveness of NATO and of the United Nations in furthering their aims, if
they did not believe their plans for Iraq were crucial to US strategy.
-By Stephen Lewis: 44 20 7338 0179: analysis@monumentsecurities.com
(Stephen Lewis is chief economist at Monument Securities Ltd., London,
independent brokers specializing in institutional business.)
Opinions expressed are those of the author, and not of Dow Jones Newswires.
This column is published for information only, and it neither constitutes,
nor is to be construed as, an offer to buy or sell investments. The information
and opinions expressed herein are based on sources the author believes to be
reliable, but he cannot represent that they are accurate or complete. Any
information herein is given in good faith, but is subject to change without
notice. No liability is accepted whatsoever by Monument Securities Ltd.,
employees and associated companies for any direct or consequential loss arising
from this article. Monument Securities Ltd. is regulated by the SFA and is a
member of the London Stock Exchange, LIFFE and ISMA.
(END) Dow Jones Newswires
03-05-03 0819ET |
