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IMF acts to avoid market ''meltdown''
By Kevin Carmichael
Bloomberg News Service
Monday, May 15, 2006
WASHINGTON -- The Bush administration, seeking to narrow its near
record trade deficit, is signaling comfort with the dollar's 6.6
percent decline this year.
Treasury Secretary John Snow's calls for stronger Asian currencies
and the need to reduce global trade imbalances have convinced some
investors and currency strategists he won't stand in the way of a
weaker U.S. currency. By not protesting the dollar's slide, the
Treasury Department is giving traders a green light to push it
"The way they look at it, they are more than happy to tolerate
market forces," said Steven Saywell, chief currency strategist at
Citigroup Inc. in London. "It's extremely unlikely you are going to
see strong policy rhetoric from the U.S." to stem the dollar's
A weaker currency would increase the attractiveness of American
exports, which rose to a record $114.7 billion in March, according
to a Commerce Department report on May 12. The increase in sales of
manufactured goods helped narrow the trade shortfall to $62 billion,
still the seventh largest ever. The gap widened to an all-time high
of $726 billion last year.
The New York Board of Trade's Dollar Index, which measures the
dollar against the currencies of six trading partners, including the
euro, yen and British pound, has lost 6.6 percent this year. The
dollar is down 8.3 percent versus the euro and 6.5 percent against
In repeatedly stating a preference for markets to set exchange
rates, President George W. Bush's economic team is suggesting it's
reconciled to a weaker dollar, said a former White House economic
"No one in the administration is going to try to talk the dollar up
or down," said Phillip Swagel, a former chief of staff to Bush's
Council of Economic Advisers and now an economist at the American
Enterprise Institute in Washington. "They want a market-determined
dollar, and they are satisfied that will mean a weaker dollar. They
aren't trying to give it a shove."
The dollar's decline has accelerated since Group of Seven finance
ministers called on April 21 for some Asian countries to let their
currencies appreciate. The statement was the first explicit call for
stronger Asian currencies by the group, which had previously sought
The G-7 described "global imbalances," reflected in the $805 billion
U.S. current-account deficit and China's surplus as a risk to the
global economic expansion. The current account is a measure of
overseas trade, services, tourism and investments.
"It dates back to the G-7 meeting," said Robert Sinche, head of
global currency strategy at Bank of America Corp. in New York. "It
appears there is a tacit agreement among the G-7 that a modest
depreciation now is preferable to a rapid one later."
Snow told reporters in Washington on May 10 he favors a "strong"
dollar with its value is set by markets, language he has repeated
since succeeding Paul O'Neill as Treasury Secretary in 2003. Bush's
administration sees a weaker dollar and faster economic growth
aboard as a way to shrink the trade deficit, the Wall Street Journal
reported on May 13, citing people familiar with their thinking.
Tony Fratto, Treasury's chief spokesman, declined to comment on the
report, referring instead to Snow's May 10 statement.
At the same time, Treasury Undersecretary for International Affairs
Tim Adams has been warning Japanese authorities not to stand in the
way of the yen's advance against the dollar since the G-7 meeting.
"We should let the market set the value and should all refrain not
only from intervening but also from commenting on exchange rates,"
Adams told reporters in Hyderabad, India, on May 4. "The less said,
Japanese officials, including Finance Minister Sadakazu Tanigaki,
have said they are ready to act as needed to prevent excessive
swings in exchange rates. Japan hasn't sold currency since March
"Put together the pieces," said Bank of America's Sinche. "The
administration is much less supportive of a strong dollar policy."
The global economic environment may be more suited to a weaker
dollar this year than in 2005, when successive Federal Reserve
interest rate increases and looser monetary policy in Japan and
Europe pushed the dollar up 14.7 percent against the yen and 14.4
percent versus the euro. It was the dollar's first annual advance
This year, the European Central Bank has raised interest rates and
signaled further tightening in response to higher oil prices and a
rebound in growth. The Bank of Japan has reduced the amount of money
it pumps into the banking industry and may lift its benchmark rate
from near zero as soon as June, economists surveyed by Bloomberg
predicted last month.
The Federal Reserve, which lifted its target rate at every policy
meeting since June 2004, said last week it's now deciding rate moves
on the basis of economic data. Chairman Ben S. Bernanke told
Congress last month the bank may take a breather.
The shift in Fed policy has more to do with the dollar's decline
than any perceived change in Treasury's stance, said Swagel at the
American Enterprise Institute.
The U.S.'s stated preference for a strong dollar, which has never
included support for a specified exchange rate, reached its heyday
under Robert Rubin, who was President Bill Clinton's Treasury
Secretary from 1995 to 1999.
Rubin and his successor, Lawrence Summers, said a strong dollar is
in the best interests of the U.S. because it tempered inflation and
interest rates. Bush, O'Neill, and Snow added a nuance: that
currency values are best set in the market, leading some investors
to question their commitment to the policy.
Snow has occasionally deviated from even that watered-down script,
pushing the dollar lower. On May 11, 2003, Snow said a weaker dollar
would help exports. Less than a week later, he told reporters at a G-
7 meeting in Deauville, France, that declines in the dollar during
the previous year were "fairly modest." The U.S. currency fell after
At meetings in Dubai in September that year, Snow convinced G-7
officials to call for "more flexibility in exchange rates" in major
countries, which was interpreted as a call for a weaker dollar. The
U.S. currency lost 8 percent against the euro in the following three
months and weakened 4 percent versus the yen.
"The U.S. has abandoned a strong dollar in everything but words,"
said Marc Chandler, a currency strategist at Brown Brothers Harriman
in New York. "The market has seen through the veneer."
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