W.....the great economist
Bush blames interest-rate differences for
dollar's slide; economists disagree
Monday June 9, 8:27 pm ET
By Martin Crutsinger, AP Economics Writer
WASHINGTON (AP) -- Europe's higher interest rates are to blame for the recent slide in
the U.S. dollar, President George W. Bush said, repeating his support for a "strong
dollar."
Private economists say a far bigger factor in the greenback's decline is America's
record trade deficit.
Bush indicated Monday that he
believed the dollar will strengthen
now that the difference in interest
rates between the United States and
Europe was narrowing, but many
private analysts forecast a
continued fall -- meaning that
European products will cost more in
the U.S. market and American
tourists will find traveling in Europe
more expensive.
Bush told reporters that he had
spent time last week discussing the
dollar's recent decline with other
world leaders at the Group of Eight
nations summit in Evian, France.
"I reminded our G-8 partners that there is a difference in interest rates, particularly
between Europe and the United States," Bush said. "And that interest rate differential
has caused people to sell dollars to buy euros to get higher return on investment. And
that's why you're seeing pressure on the dollar."
Bush said that he expected "different behavior" as the difference in interest rates
between the United States and Europe begins to narrow.
Last Thursday, the European Central Bank, which sets interest rate policy for the 12
nations that share the euro as a common currency, slashed a key interest rate by a
half-point to 2 percent, the lowest level since World War II.
The Federal Reserve, in a series of 12 rate cuts beginning in early 2001, has pushed
the comparable U.S. interest rate down to a 41-year low of 1.25 percent. Many
economists believe the Fed will cut the rate further to 1 percent or even lower when
Fed policy-makers next meet on June 24-25.
"I repeat as clearly as I can: the policy of the United States government is a strong
dollar policy," Bush said in his brief comments to reporters .
Analysts believe the opposite: They think the administration wants the dollar to lower
the trade deficit. A weaker dollar makes U.S. products more competitive on overseas
markets and foreign goods more expensive for U.S. consumers.
"The dollar had gotten too strong and it was contributing to huge trade deficits," said
Sung Won Sohn, chief economist for Wells Fargo in Minneapolis.
Private economists say Bush's latest comments are in the same vein as the subtle shift
in policy signaled over the past month by U.S. Treasury Secretary John Snow:
Policy-makers say they back a strong dollar, but couch their support with enough
qualifications to convince currency traders that nothing will be done to halt the dollar's
slide.
The euro hit a record high against the dollar last week and over the past year the dollar
has fallen by more than 20 percent against the euro.
Analysts said interest rates have played only a small part in the decline, and say the
bigger reason is soaring trade deficits. The U.S. current account, the broadest
measure of trade, hit an all-time high of $503.4 billion last year, up 28 percent from the
2001 deficit of $393.4 billion.
Many economists believe the current account trade deficit, which reflects not only trade
in merchandise but also services and investment flows, will hit a new record of $568
billion this year, meaning the United States must attract more than $1 billion a day in
new foreign investment to pay for the trade imbalance.
As long as the dollar's decline is orderly and does not spark panic selling by foreign
investors of U.S. stocks and bonds, the weaker dollar should lead to stronger U.S.
economic growth by boosting the fortunes of American manufacturers, who have
suffered three years of losses in manufacturing jobs.
David Wyss, chief economist at Standard & Poor's in New York, predicted that the
dollar will decline by another 7 percent before the end of this year, reflecting further
increases in the trade deficit.
Presidential spokesman Air Fleischer said that Snow briefed Bush and the Cabinet on
his expectations that the sluggish U.S. economy, which has been flirting with a new
recession, will post significantly higher growth in the second half of this year.
Treasury Department: ustreas.gov
CC |
