U.S. Dollar Policy Is Redefined By Snow During G-8 Meetings
DEAUVILLE, France -- U.S. Treasury Secretary John Snow said he has abandoned the eight-year-old American strategy of oral support for a "strong" dollar against the world's other major currencies.
While insisting the Bush administration still has a "strong dollar policy," Mr. Snow radically redefined what that means. Speaking to reporters after an economic summit here, he said the U.S. government no longer measures the dollar's strength by its market value -- the long-time commonly accepted premise of that policy.
The Treasury Secretary's new currency strategy carries both large potential benefits and risks for the U.S. economy. Currency traders have been carefully parsing Mr. Snow's words, and his weekend comments could trigger another sell-off in the already weakened dollar. A falling dollar can aid the U.S. economy by boosting exports for ailing manufacturers. But it can hurt if it further pushes foreign investors out of U.S. capital markets.
Mr. Snow made his comments Saturday after weekend meetings with counterparts from the Group of Eight wealthy nations. After a week of roiling foreign-exchange markets with cryptic comments about the dollar, Mr. Snow was asked by reporters here to define what "strong" means to him.
Mr. Snow replied: "You want people to have confidence in your currency. You want them to see the currency as a good medium of exchange. You want the currency to be a good store of value. You want it to be something people are willing to hold. You want it hard to counterfeit, like our new $20 bill. Those are the qualities."
More important than what he said was what he didn't say. Asked whether the U.S. strong-dollar policy still refers to its value against other major currencies, he responded: "We're talking about these qualities that I enumerated."
In case anyone thought the omission was an accident, he explained that it wasn't: "I've been careful to say what we mean by a strong dollar."
Treasury officials are clearly nervous that the dollar will plunge in markets Monday as traders absorb the secretary's message that he is no longer offering a rhetorical brace for the dollar. Chief Treasury spokesman Rob Nichols, who sat by Mr. Snow's side as the secretary spoke, hastened to tell reporters afterward that "there has been no change in policy."
But administration officials are comfortable with the dollar's decline, because they believe it will help the U.S. economy recover. Mr. Snow said the G-8 ministers agreed the global recovery depends most of all on the U.S. economy perking up.
Mr. Snow executed his new dollar strategy by overtly tweaking the usually subtle language with which Treasury secretaries talk about currencies in order to guide, calm or reassure markets. Starting in 1995, a year in which the dollar sank to post-World War II lows against the former German mark and the Japanese yen, then-Treasury Secretary Robert Rubin began repeating the refrain, "A strong dollar is in the U.S. interest." From that moment, it was almost his only public comment on the currency. He rarely took action to alter the dollar's value, but his words, and those of his successor Lawrence Summers, reminded markets that there was an invisible floor under the currency's exchange rate.
The rhetoric probably helped keep the dollar's value relatively high, and markets calm, during the boom of the late 1990s. At the time, a strong dollar encouraged cheap imports, keeping inflation tame and the economy from overheating.
President George W. Bush's first Treasury boss, Paul O'Neill, riled markets with early improvisations on the dollar before reluctantly embracing the Rubin script.
Now, however, the U.S. economy is threatened by deflation, not inflation. Far from overheating, the economy is stumbling along after a brief recession. Many economists believe today the Rubin axiom is reversed: It's now a weak dollar that is in the U.S. interest, not a strong one.
The Bush administration's new tack in international financial policy comes at a time when the dollar is weakening anyway, with the euro up more than 27% against the dollar during the past 12 months and investors wondering whether the Treasury secretary, whatever he might say out loud, actually prefers it that way. The limping U.S. economy could benefit from a weaker currency, which combats deflation and gives American companies a price edge over their foreign competitors.
The shift in official rhetoric, however, represents a risky move for a former railroad executive new to the Treasury job and to international finance. On top of his rejection of the strong-dollar policy of his predecessors, Mr. Snow said Saturday that the dollar's recent slide "really is a fairly modest realignment of currencies."
Currency markets are notoriously hard to predict. But traders could well see the secretary's new stance and seeming endorsement of the dollar's decline as reason to believe the administration is giving its tacit blessing to an even-weaker dollar. The dollar has fallen by 9.5% of its value against the yen during the past year, and it wobbled further on Mr. Snow's comments last week highlighting the benefits of a weaker currency for U.S. exporters. The danger is a selloff that could drive the dollar down further and faster than Mr. Snow might want, perhaps forcing up interest rates and crimping the U.S. recovery.
Mr. Snow made his remarks after weekend meetings with counterparts from the G-8 wealthy nations where the ministers focused on the disappointing economic growth around the world. G-8 nations include the U.S., Germany, France, Britain, Japan, Italy, Canada and Russia.
Behind closed doors and in public, Mr. Snow, in particular, prodded France, Germany and Japan to embrace tough overhauls that could enhance economic growth. Japan has been in a slump for more than a decade. The European Commission's optimistic estimate is that the 12-nation euro zone economy will grow a mere 1% this year, and Germany announced last week that its economy actually shrank in the first quarter. Private analysts estimate the U.S. economy will grow just 2.3% this year, according to Blue Chip Economic Indicators.
The bad news is "bringing home" to the G-8 governments "the urgent need for far-reaching actions to deal with this problem," Mr. Snow said. "And our response is we're doing what we can, but it takes more than one engine to drive this world economy." He pointed to the passage by both the House and Senate of versions of the president's tax cut as evidence that the U.S. is acting to spark economic growth at home.
Privately, European officials say they don't want the dollar to fall -- or the euro to rise -- too far. "The exchange rate needs to reflect economic fundamentals, which is a message against overshooting," one senior European finance ministry official said. The European ministers also hope their own European Central Bank will take the hint and cut interest rates, which might at least temper the euro's rise.
In public, though, the Europeans were less candid, leaving the word "stable" as their clue that a further strengthening is unwelcome. "The evolution of the euro has helped to keep inflation under control, and the euro today more reflects economic fundamentals," Pedro Solbes, the European Union economic commissioner, told reporters after the G-8 meeting. "And the euro zone is in favor of a strong and stable euro."
By MICHAEL M. PHILLIPS
Staff Reporter of THE WALL STREET JOURNA |
