Why Washington Isn't Sweating the Dollar's Drop
By JONATHAN FUERBRINGER - NEW YORK TIMES
KL, I think this explains the yawns in DC to this question.
The dollar is weaker, but is it too weak?
The answer from the Bush administration is no, according to some analysts, who note that a falling dollar could help the American economy rebound by making United States exporters more competitive abroad and foreign companies less competitive here. Private economists agree.
A look at history shows that the dollar is not in immediate peril. There is no dollar crisis afoot, as there was when the Carter administration sought to support the dollar in 1978.
While the dollar is down 9.1 percent against the euro this year and 27.5 percent since the dollar's recent peak in July 2001, it is down only 3.7 percent this year and 6.4 percent since July 2001 based on an index of the currencies of 37 countries compiled by the Federal Reserve. Against this broad index, the dollar is only at its lowest value since July 2000 and is 20.1 percent above its low in 1978.
And to top it off, the decline in the dollar, which normally would bolster inflation by making imports more expensive and push interest rates higher, is coming at a time when inflation is so tame that Fed officials will not worry if prices go higher and interest rates are near lows not seen in more than four decades.
"I really don't see any negatives in a weaker dollar right now," said Ed Yardeni, chief investment strategist at Prudential Securities, who noted that a weaker dollar would help improve corporate profits here.
C. Fred Bergsten, director of the Institute for International Economics in Washington, agreed: "The normal negatives ? rising inflation and rising interest rates ? are nowhere to be seen. This is the optimum time. Let it rip."
There is a downside, however, and that is for Americans traveling abroad, especially in Europe, where the decline in the dollar has made business and vacation trips much more expensive.
Still, those trips are only more expensive than they were four years ago. Trips to Europe are still cheaper than they were for much of the early and mid-1990's.
The dollar's slide has received a lot of attention lately. In trading yesterday, the dollar's fall pushed the euro to $1.1624, just shy of the $1.1667 at which it was introduced on Jan. 1, 1998, before retreating. By the afternoon in New York, the euro was trading at $1.1541. Against the yen, the dollar edged lower, to 116.99 yen from 117.19 on Friday.
The early dollar sell-off yesterday was touched off, currency analysts said, by an apparently innocuous remark on Sunday by Treasury Secretary John W. Snow.
On "This Week" on ABC, Mr. Snow was asked, "Is the dollar now at a level where it can give a significant boost to exports?" Mr. Snow replied: "Well, you know, when the dollar is at a lower level, it helps exports. And I think that exports are getting stronger as a result, yes."
But in a foreign market where traders say the trend is your friend, everyone is looking for any sign that the administration has backed away from its stated strong-dollar policy.
So Mr. Snow's remark provided a reason to sell dollars overnight in Asia and early in Europe. The dollar rebounded a little in the United States as traders realized that the remark was not that significant.
"Snow's comments had a modest impact on what is already an enormous trend," said David Puth, global head of foreign exchange and commodities at J. P. Morgan.
The heavier weights on the dollar include the United States' $500 billion current account deficit with the rest of the world, interest rates here that are lower than in many other countries, lingering doubts about the revival of the American economy and worries about low inflation turning into deflation.
In addition, foreign central banks and finance ministers, who know stronger local currencies could impede their own economic recoveries, have yet to protest against the negative effect of a falling dollar.
"It is my belief that the United States government will continue to suggest that a strong dollar is in the country's best interest," Mr. Puth said.
"On the other hand," he said, "when we have seen a lack of resistance from the Treasury and other central bank officials to the decline, there is a suggestion that they accept the trend as a reflection of the economic realities of the day."
The administration's main concern is that the decline does not turn into a free fall that becomes a crisis by sending both inflation and interest rates up quickly. A free fall can be avoided, said David Gilmore, a partner at Foreign Exchange Analytics in Essex, Conn., "as long as foreign investors don't think the administration is going to allow the dollar to collapse."
How much further will the dollar go? Most forecasts for the year have already been surpassed, which means a euro at $1.20, or a dollar decline of almost 13 percent in 2003, is not out of the question.
What could stop the decline? Larry Kantor, the global head of market strategy at Barclays Capital, said he did not think that a rebound in economic growth here would be enough to turn things around. He noted that despite the strong rally in stocks since the end of the main fighting in Iraq ? something that should attract foreign investors ? the dollar's decline has accelerated.
What is needed to stop or slow the decline soon, he said, is protests from Europe about how the rising value of the euro is strangling an economic recovery there. And, he said, if that protest is backed up with cuts in interest rates by the European Central Bank, the dollar could find a bottom.
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