Dollar can be weak, strong at same time, ex-Treasury official ... er, explains


By Susan Fenton
Monday, March 31, 2008

HONG KONG -- The dollar is likely to remain under pressure for the next few months at least, but its weakness is not inconsistent with the Bush administration's strong dollar policy, former U.S. Treasury undersecretary Tim Adams said on Monday.

"A strong dollar policy is a pledge by the United States not to use the dollar as a tool to gain competitive advantage in global markets. So it's not inconsistent," Adams, who was the Treasury's top international official until last summer, told a conference in Hong Kong.

The dollar has plumbed record lows against the euro as the U.S. credit crunch has worsened.

This has prompted some commentators, including Mohamed El-Erian, co-chief executive officer of Pimco, the world's biggest bond fund, to call for concerted central bank intervention to stabilise the currency and steady global markets.

Steve Hanke, an economics professor at Johns Hopkins University in the United States, agreed that international action, as well as expansionary fiscal policy in Japan and Europe, were needed to help put a floor under the dollar.

Countries including China and Middle East nations that have large holdings of dollars in their reserves should pledge not to talk about diversifying their portfolios while action is being taken to stabilise the U.S. currency, Hanke told the conference.

Gulf countries in addition should stop talking about de-pegging their currencies from the dollar.

"It's unproductive and creates a great deal of short-term volatility in the dollar," he told the Credit Suisse Asian investment conference.

Adams said the dollar was likely to remain under pressure for the next few months because of uncertainty about when the U.S. business cycle will bottom out and how far the Federal Reserve will cut interest rates.

But he said the currency would find its footing, as the American economy is still fundamentally stable and the United States is one of few countries that will be able to keep absorbing huge global capital flows.

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