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No mention of 'strong dollar' policy from new Treasury secretary
By Jamie McGeever
Thursday, June 29, 2006
NEW YORK -- With an increasing focus on transparency
in financial markets, what policy-makers don't say is
often more telling than what they do.
When U.S. Treasury Secretary Henry Paulson failed to
mention the "strong dollar" policy at his Senate
confirmation hearing on Tuesday, it surprised many on
The silence contrasts starkly with remarks by
Paulson's two immediate predecessors, Paul O'Neill and
John Snow. They used their hearings to stress,
unprompted, that they favored a strong dollar, which
they said was in the United States' interest.
Paulson's silence on the dollar will have no
discernible impact on currencies immediately. But for
many observers, it is another confirmation that the
U.S. government won't object to a weaker dollar over
"I am confident we will hear Paulson utter the mantra
at some point," said David Gilmore, partner at FX
Analytics, a consultancy firm in Essex, Connecticut.
"But we should also stand back a bit and recognize
that this week's confirmation hearing and the silence
on the dollar speak volumes."
Although policy-makers in Asia and Europe might not
like it, "There is near unanimity in the belief that
markets will in time take the dollar lower," Gilmore
At the same time, the absence of rhetoric may not
signal a seismic shift. The "strong dollar" policy
under Robert Rubin and Larry Summers in the 1990s has
been diluted over time.
Rubin and Summers used the mantra to influence the
external level of the dollar, while O'Neill and Snow
generally used it "out of legacy ... and to assure
investors that an 'invisible' safety net was in
place," Gilmore said.
Certainly, Snow's public support for a strong dollar
always carried the caveat that currency values are
best set in open markets, casting doubt on the
effectiveness of intervention.
Still, Paulson's silence was not without
"The failure to emphasize the rhetoric up front is
perhaps symptomatic of a further downgrading of the
policy," UBS currency strategists wrote in a note to
clients on Wednesday. "Paulson may be less inclined to
reflexively roll out the strong-dollar mantra of his
While the White House declined to comment on why
Paulson didn't mention the dollar in his remarks,
Treasury spokesman Tony Fratto said Paulson "wasn't
asked about currency policy. The administration's
views on currency policy are unchanged."
O'Neill, at his confirmation hearing in January 2001,
said he was "in favor of a strong dollar. I can't
imagine why anyone would think to the contrary."
Two years later his replacement and now outgoing
Treasury chief, John Snow, said in prepared remarks,
"I favor a strong dollar. A strong dollar is in the
And when asked, Paulson will toe the party line, said
Ron Simpson, managing director of foreign-exchange
analysis at Action Economics in New York. If he
doesn't, the dollar could fall sharply on global
"I don't think there's a major shift here -- maybe
some nuances -- but these nuances have been building
for a while now, certainly since China came into the
picture," Simpson said. "I don't think it's a big
secret that the administration would be happy to see a
Investors are particularly sensitive to Treasury's
policy because of the central role of the greenback
that many expect to play in fixing the so-called
global imbalances -- a term seen as code for the huge
U.S. current-account deficit.
A weaker dollar, many analysts say, would crimp
Americans' appetite for imports, make U.S. exports
cheaper on global markets, and therefore help shrink
The Group of Seven richest countries and the
International Monetary Fund promote the ideas that the
United States must cut its fiscal deficit, China must
let its currency trade more freely, Japan and the rest
of Asia must improve domestic demand, and Europe must
make its economy more flexible.
But both groups have been careful not to call for a
weaker dollar, for fear of triggering a run on the
greenback that would wreak havoc on world markets and
Meanwhile, Paulson is on record as welcoming an
"orderly" decline in the U.S. currency.
"I'm concerned about the current-account deficit, but
I would say by order of magnitude I'm more concerned
about the budget deficit ... because I really believe
that the decline in the dollar -- the orderly decline
in the dollar -- will lead to a natural adjustment,"
he said in an interview two years ago on U.S. public
The dollar has lost around 30 percent of its value
against a basket of major currencies since the start
of 2002, its slide halted only in the last 18 months
as the Federal Reserve has pressed on with its
campaign of rate increases.
Now that the Fed tightening is thought to be near an
end, markets' focus may shift back to global
imbalances, which highlight how much foreign capital
the U.S. must attract to plug its deficits, and
prevent an even steeper fall in the dollar and spike
up in interest rates.
Currency strategists at HSBC also noted Paulson's
silence on the dollar but put it in the context of his
pledge to help drive G7 initiatives to address global
"And we still view the effort to reduce global
imbalances and the U.S. current account deficit itself
as medium-term bearish factors for the dollar," HSBC