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Bush and Paulson try talking the dollar up

Section: Daily Dispatches

With Strong-Dollar Call, Bush Betrays Fears over Economy

By Gerald Baker and Tom Baldwin
The Times, London
Tuesday, June 10, 2008

President Bush issued a call for a rise in the value of the US dollar on currency markets yesterday in a signal of mounting official alarm in Washington about the effect of the slumping greenback on the world's largest economy.

In an exclusive interview with The Times on the eve of the United States-European Union summit in Slovenia, Mr Bush expressed concern about the dollar's continuing weakness and said that he favoured an appreciation in the US exchange rate.

"We want the dollar to strengthen," he said on Air Force One as it crossed the Atlantic bound for the summit.

The president did not suggest that the United States was preparing to back its rhetoric on the dollar with any formal intervention in the exchange markets. He said that the "relative evaluations of economies will lead to that dollar strengthening."

However, his remarks clearly reflected the concern in Washington at the dollar's decline, which accelerated last week amid news of a further weakening in the US economy.

Henry Paulson, the US treasury secretary, in an interview on American television yesterday, hinted at a growing inclination in Washington to prop up the dollar. Mr Paulson said that he "would never take intervention off the table." The dollar rallied 1.3 per cent against the yen to Y106.23 amid hopes of intervention. The euro fell 1 per cent to $1.5626.

In a further signal of official US concern, Mr Bush said before he left Washington that he would raise the issue of the economy and the need for a strong US dollar at the summit, which begins today. He added that Mr Paulson would discuss the global economy at a meeting of the Group of Eight finance ministers in Tokyo this week. The US currency has fallen by more than 40 per cent against the euro and by 36 per cent against sterling in the past six years. While that has helped US exporters and has made American goods more competitive at home, it has helped to unleash inflationary pressures.

The Bush administration and the US Federal Reserve have been strongly criticised in America for not doing more to support the dollar. Critics argue that the central bank's interest-rate reductions in the past nine months, designed to save the economy from the full effects of the global financial crisis, have pushed the dollar into dangerous freefall. Although the Bush administration has said repeatedly that it supports a strong dollar, it has declined so far to take any direct action to support the currency.

On Friday the Labour Department reported that unemployment rose by 0.5 percentage points in May, the largest monthly increase in more than 15 years. On the same day, oil prices recorded their sharpest one-day increase in history and equities tumbled by more than 3 per cent.

In yesterday's interview, the president expressed confidence that the US would emerge in good shape from the crisis but acknowledged that the short-term outlook was still challenging. "We are a robust, flexible economy. No question we’re having a tough time, as are other nations," he said.

Last week Ben Bernanke, the chairman of the Federal Reserve, hinted for the first time that the central bank was concerned about the weakening dollar and suggested that the Fed was unlikely to cut interest rates again soon. Mr Bernanke sparked speculation that the Fed and the US Treasury might intervene on the dollar last week when he said that he was working with the Treasury to "formulate policy" that would prevent the dollar from declining further.

Kevin Logan, chief economist at Dresdner Kleinwort, the investment bank in New York, said: "There is clearly some unity of purpose between them and they are really concerned about dollar depreciation and the related inflation expectations."

The last time the US intervened to support the dollar was during the Clinton administration.

Mr Paulson also indicated that Washington has no current plan of action to deal with the rising price of oil.

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