Anyone remember our chat on "strong dollar" policy (or its lack thereof, really)? Well, it seems Snow meant a currency that is "accepted by people, is a store of value and is hard to counterfeit" :-)
I love this - If you don't want to reverse yourself and look dumb, or you dread giving bad news, just change the definitions!
For example:
(1) Your earnings dropping to the center of the earth? Abracadabra! Change the definition of "earnings" - Announce "pro-forma earnings"!
(2) Can't explain interest rates are low despite 2-3% consistent inflation? Change the definition of "inflation" - Forget the CPI and PPI, keep talking about "price index for personal consumption expenditures excluding food and energy"!
(3) USD loses 30% against major currencies, despite your previous announcements that you were still supporting a strong dollar policy? Change the definition of "strong dollar" - i.e. NOT one with high value but one that is difficult to counterfeit! -g-
This would be hilarious if it were not so tragic...
Anyway, read the news below:
quote.bloomberg.com
Snow's Redefined `Strong Dollar' May Extend Slide (Update1)
Deauville, France, May 19 (Bloomberg) -- U.S. Treasury Secretary John Snow, just three months into the job, has scrapped the government's eight-year-old ``strong-dollar policy,'' investors and economists said.
A week ago, Snow said the dollar's 21 percent decline against the euro in the past year was helping U.S. exports. He repeated that theme during the week and on Saturday delivered what some traders consider the coup de grace: At the close of a Group of Seven finance ministers meeting in France, he characterized the dollar's drop in value as ``fairly modest.''
The strategy of U.S. Treasury secretaries urging a so-called ``strong dollar'' has ``been abandoned,'' said Paul McCulley, a managing director at Pacific Investment Management Co., which manages the world's biggest bond fund.
The immediate consequence likely will be to extend the dollar's slide against the euro as well as they yen, investors said. In time, that may help U.S. exporters, giving Snow the boost he seeks to speed U.S. economic growth and bolster odds for President George W. Bush's reelection in 2004. The economy grew at a 1.6 percent annual rate in the first quarter, a pace that Snow considers to be half its potential.
Bow to Market
The dollar dropped to $1.1702 per euro at noon today in Tokyo, from $1.1588 late in New York Friday, its weakest since January 15, 1999. The U.S. currency also fell to 115.26 yen, from 116.07 yen. It has slumped more than 8 percent against the yen in the past 12 months.
Economists said Snow's comments redefined the policy from a tacit endorsement of a strong dollar to one in which the U.S. tolerates the value the market sets, as long as the dollar remains an international symbol of safety. Snow's aides say there has been no shift.
Investors who have ridiculed the previous creed as little more than rhetoric, and who must put their money on the line, say otherwise.
``The market had been wondering whether the strong dollar policy was real,'' said Mark Thome, vice president of foreign exchange at Fortis (USA) Financial Markets. ``It's pretty clear it's not.''
Snow triggered the dollar's biggest weekly fall in 10 months against the euro a week ago when he said exports were benefiting from the decline, signaling a lack of concern with the slide. The drop continued on Tuesday after he said currency values should be driven by underlying economics and set by markets without governments manipulating them.
`Fairly Modest'
The U.S. currency lost 0.9 percent against the euro last week. It fell 1.2 percent against the yen and reached 115.34 on May 15, the lowest in more than two years.
Bond and currency traders interpreted Snow's remarks to mean the U.S. would do nothing in the markets to stem the dollar's decline. They say Snow validated that interpretation Saturday with his comments following a meeting of finance ministers from the Group of Seven industrialized nations in Deauville, France.
Investors say the most telling remark, one that shows Snow's tolerance for a lower dollar and gives them confidence to keep selling the currency, came when he described the dollar's drop as ``fairly modest.'' That followed a March observation that the dollar's fall was not ``troubling.''
In a market where nuance matters, investors said Snow's commentary marked a seismic shift.
Pressed by reporters to define what he means by a ``strong dollar'' Snow replied, ``What you want to be strong is you want people to have confidence in your currency.'' That means it is accepted by people, is a store of value and is hard to counterfeit, he said.
`No Change'
Its value ``reflects the fundamentals of demand and supply for currencies,'' he said. Asked if his position is the same as his predecessors, he said he didn't know and had never discussed it with them.
The comments enhanced ones made Wednesday to a House committee, where he said there's ``no conscious policy on the part of the United States to move the dollar at all.''
Bush administration officials cited Snow's Jan. 28 confirmation hearing, at which he stated: ``A strong dollar is in the national interest. A strong currency provides a reliable medium of exchange and serves as a stable store of value that people choose to hold,'' as evidence that his policy was unchanged. ``Sound, pro-growth economic policies and a commitment to free and open markets are the foundation for a strong dollar,'' Snow said.
``There has been no change in policy,'' said Rob Nichols, chief spokesman for the Treasury.
Economy Switches Gears
The U.S.'s stated preference for a strong dollar, which has never included support for a specified exchange rate, reached its heyday under Robert Rubin, who ran the Treasury from 1995 to 1999. A former executive with Goldman, Sachs & Co., he and successor Lawrence Summers formulated with robotic precision the statement that a strong dollar is in the best interests of the U.S. because it tempered inflation and interest rates.
Paul O'Neill, Snow's predecessor, suggested 27 days into his tenure that no strong dollar policy existed under him. He quickly recanted and pledged to hire out New York's Yankee Stadium to announce if he ever altered his stance. He resorted to saying he had a ``strong dollar policy'' without defining it.
The U.S. hasn't intervened in currency markets since September 2001 and hasn't bought dollars since August 1995.
The practice of talking up the dollar is outdated, considering that U.S. unemployment reached an eight-year high of 6 percent in April and consumer prices fell for the first time since 2001, some analysts said.
Helping U.S. Manufacturers
While a strong dollar was a virtue in the 1990s when it offset price pressures during the longest boom in U.S. history, the recent recession and sluggish recovery have made it harder for the government to justify a desire for strength, they said.
``The policy first came when the U.S. was growing strongly, but when an economy weakens and a currency doesn't, that hurts manufacturers and Snow appreciates that,'' said Kamal Sharma, a currency analyst at Commerzbank AG in London.
Snow understands the effect a currency has on business. In 1998, as the chief executive of CSX Corp., he blamed a rising dollar for hurting his railroad company's profits. He once chaired the Business Roundtable, a group of chief executives that last year urged the Treasury to stop stating a preference for the dollar's direction.
Relief for the Fed
The economy is already benefiting from the declining currency as U.S. manufacturers such as Caterpillar Inc., the largest maker of earth-moving equipment, find their goods are cheaper overseas and the cost of foreign goods more expensive. The dollar's slump also increases the value of international sales when converted into dollars. By lifting import prices it also reduces Federal Reserve worries over deflation.
The Bush administration is ``very happy with the weaker dollar and it also provides some relief for the Fed,'' said Lara Rhame, a foreign-exchange economist at Brown Brothers Harriman & Co. in New York who used to work at the central bank. ``They're happy to see it fall.''
The risk for Snow is that with the trade deficit widening to the second largest on record in March, a rapid decline in the dollar risks scaring international investors from dollar- denominated assets.
The U.S. needs to raise $1.5 billion a day to plug the shortfall and the lower dollar means foreigners find their U.S. earnings falling when translated into their domestic currencies. That may prompt them to either withdraw capital or demand higher interest payments on their investments, hampering economic growth.
``If the decline of the dollar got really severe -- like 4 or 5 percent every day -- then that would put a currency risk on markets and they would probably moderate their language again,'' said Rhame.
For Snow, the best way to raise the dollar is by concentrating his efforts not on discussing it but by improving the economic fundamentals through tax cuts, a strategy he also hopes will aid Bush's reelection next year, analysts said. A robust economy should translate to a better dollar and election campaign.
``To them a strong dollar means having a strong economy so their focus is on trying to prime that with tax cuts,'' said Michael Woolfolk, a currency strategist at Bank of New York, which holds $6.8 trillion in assets in custody. ``A lower dollar will certainly help U.S. growth as we head into the next election.''
Last Updated: May 18, 2003 23:10 EDT |
