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Devaluation of euro reported to be under consideration

Section: Daily Dispatches

Cheapening the Dollar

By Edmund L. Andrews
The New York Times
Sunday, Februay 8, 2004
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WASHINGTON -- Treasury Secretary John W. Snow has tacitly
but unmistakably abandoned Washington's longstanding
support for a strong dollar in favor of a weak dollar that
is getting weaker, though he continues to insist there has
been no change in policy.

Stripped of the code words and elliptical references to
quot;excessive volatilityquot; in exchange rates, the message that Mr.
Snow delivered this weekend to finance ministers from Europe
and Japan was that the dollar's plunge against the euro is just
fine and that the dollar should now decline more rapidly against
Asian currencies as well.

In so doing, the Bush administration has made a calculated
economic and political choice. By condoning and even
encouraging a cheap dollar, the administration is providing a
big push to American exporters by making their products less
expensive in foreign markets.

That should encourage more hiring and lower unemployment
leading up to the election. The only immediate losers are
exporters in Europe and Asia who have to choose between
cutting prices or losing market share in the United States.

But the long-term risks are substantial. At some point, a
weaker dollar will inevitably lead to higher prices for imported
goods -- almost all consumer electronics bought by
Americans, most of their clothing, many of their cars, and
much of the oil that provides the fuel to drive them.

A much bigger risk is that a plunging dollar could contribute
to a rise in interest rates, as foreign investors demand fatter
risk premiums before agreeing to buy hundreds of billions of
dollars worth of Treasury securities to finance America's high
levels of indebtedness.

The United States needs to attract $1.5 billion a day in net
capital inflows from abroad -- $500 billion a year more than it
sends out -- which means that the world is being flooded by
American IOUs at levels never seen before. The administration's
huge budget deficits could increase that need for foreign
capital even more, and higher interest rates would add billions
of dollars to those deficits.

Foreign buyers, and Asian central banks in particular, are
now the most important buyers of American Treasury bills and
bonds. But much of that buying had little to do with the rosy
economic outlook for the United States and very much to do
with propping up the dollar against the Japanese yen and the
Chinese yuan.

The dollar would probably be declining regardless of what Mr.
Snow said, because the United States is now so indebted to
the rest of the world that the appeal of American securities is
considerably less than it was at the height of the boom.

Since its peak in the fall of 2000, the dollar has lost nearly
half its value against the euro.

In the joint communiqu they issued after the Group of 7
meeting ended in Boca Raton, Fla., on Saturday, the finance
ministers declared that quot;excessive volatilityquot; and quot;disorderlyquot;
movements in exchange rates were bad for economic growth.

That was a partial nod to European leaders, who were
beginning to panic about the weak dollar and suddenly strong
euro. European officials interpreted the communiqu as
acknowledging their worries about the euro's recent surge
and giving them a justification for intervening in the markets if
the euro shoots up in any way that might be considered
quot;disorderlyquot; and quot;excessive.quot;

quot;The Europeans were huge winners and the Japanese were
huge losers,quot; said Paul McCulley, fund manager for Pimco
advisers, one of the nation's largest bond investment funds.

But the official American view was quite different. The
American interpretation was that the Group of 7 had said
nothing at all about the dollar's value against the euro and
that a further gradual decline in the value of the dollar would
be entirely different from a quot;disorderlyquot; decline or quot;excessive

Put another way, Mr. Snow was not calling for the dollar to
climb back in value but for it to sink more rapidly against the
Asian currencies. For currency traders and analysts gearing
up for the markets to open on Monday, the big question was
not whether the dollar would stop declining but whether the
Japanese yen would abruptly jump in value.

The problem confronting American and European officials alike
is that China, the most explosive player on the Asian scene,
is not even a member of the Group of 7. quot;China is the
800-pound gorilla and it isn't even part of the negotiations,quot; Mr.
McCully remarked.

China has kept its currency pegged at a fixed exchange rate
to the dollar for the past decade, and it has done so by a
combination of restrictions on capital flows and heavy
purchases of American securities. But most economists
contend that China's currency has become seriously
undervalued as its trade surplus with the United States has
soared to well over $100 billion and its treasury has a
ccumulated more than $300 billion in foreign reserves.

Japan, by contrast, has allowed its currency to rise in the
past month even as it bought $67 billion in American securities
to slow that rise.

Japanese officials signaled this weekend that they will
continue to intervene to preserve quot;stablequot; exchange rates,
and the American-approved denunciation of quot;excessive
volatilityquot; may have given them implicit permission to do

But no matter what happens to the yen, many analysts
predict the dollar's overall value is still headed down.

quot;This doesn't do anything to alter the perception that the
administration would like the dollar to decline further,quot; said
Robert Hormats, vice chairman of Goldman Sachs
International. quot;I don't think the markets will be very


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