Friday, Feb. 16, 2001
O'Neill Remark Confuses Financial Markets
LONDON (Reuters) - U.S. Treasury Secretary Paul O'Neill was quoted on Friday as saying the United States was not actively following a strong dollar policy, throwing financial markets into confusion.
The policy, which has held that a strong dollar is in U.S. interests, underpinned the rally in U.S. financial assets during the second half of the 1990s.
``We are not pursuing, as it is often said, a policy of a strong dollar. In my opinion a strong dollar is the result of a strong economy,'' O'Neill said in an interview with Germany's Frankurter Allgemeine Zeitung, published a day before a Group of Seven industrial nations meeting in Palermo, Italy.
The dollar took an immediate hit on the comments, losing half a cent to the euro and nearly half a yen, but rebounded after the U.S. Treasury said that there had been no change in the strong dollar policy.
``There has been no change in a strong dollar policy at all,'' a U.S. Treasury spokesman said, adding Treasury Secretary Paul O'Neill had not said anything different from before in an interview with Germany's Frankfurter Allgemeine Zeitung.
He added that the strong dollar was a reflection of the strong U.S. economy.
FX POLICY IN FOCUS
Currency markets went on high alert when U.S. President George W. Bush picked O'Neill for the top job at the Treasury, with speculation rife that the former chairman of aluminum giant Alcoa would be more sympathetic than his predecessors to the pain inflicted on U.S. exporters by a strong dollar.
But against a backdrop of slowing U.S. growth, traders became concerned that O'Neill would distance himself from a policy, which had been crafted and maintained by Robert Rubin, a former investment banker, and Lawrence Summers, an academic.
O'Neill sought to put such worries to rest after he said a month ago at his confirmation hearing before the Senate Finance Committee that there would be no sudden shift in the United States exchange-rate policy:
``I thought, in the interest of not wasting a lot of television footage, I should say at the very outset, I am in favor of a strong dollar. I can't imagine why anyone would think to the contrary.''
INTEVENTION THE EXCEPTION
O'Neill said in the FAZ interview that intervention in currency markets was not right in principle but there could be exceptions.
``To intervention I only want to say this much: In principle there should not be intervention in markets. But there can be exceptions,'' he was quoted as saying.
O'Neill said the U.S. Federal Reserve's one percentage point interest rate cut in January had been very useful but said he was not sure whether it would have an effect soon.
``I'm not sure whether we will soon see the first signs of a recovery in the economy or whether we will have a zero growth rate for some time,'' he said.
When asked whether the economy in the euro zone was weak, O'Neill answered by referring to the single currency:
``I don't understand all this talk about a weak euro. Who wants to say with certainty where the ``right'' rate for the euro against the dollar is?''
He said he had told Congress it was important to bring in President Bush's plans for a $1.6 trillion reduction in taxes as soon as possible.
O'Neill said the tax reform could be financed without eating into that portion of the U.S. budget surplus earmarked for social security and pensions.
But he signaled that this act of fiscal loosening was not the beginning of a trend.
``We must maintain discipline and not allow ourselves to fall into huge new spending programs,'' O'Neill said.
He said the financial markets would do well to price the future into their current calculations. ``At the moment the data shows that the market is assuming another rate cut. That is good for the economy,'' he said.
O'Neill reiterated his dislike for intervening to help other countries out of financial crises.
``In the future it will be important to show countries who threaten to fall into difficulties that the rest of the world will not be ready to help them.''
Asked whether the U.S. government would buy up private investments if there were further budget surpluses and no more debts to pay off, O'Neill said:
``That is a terrible idea. In a capitalist system like ours it is not the business of the government to own companies.''