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Newly Defined 'Strong Dollar' Signals Change in U.S. Policy May 19, 2003
Treasury Chief Snow's Strategy Stresses Confidence Rather Than Market Value
By MICHAEL M. PHILLIPS Staff Reporter of THE WALL STREET JOURNAL
DEAUVILLE, France -- The Bush administration has abandoned the eight-year-old U.S. strategy of verbally supporting a "strong" dollar in foreign-exchange markets, Treasury Secretary John Snow indicated during the weekend.
While insisting the U.S. still has a "strong-dollar policy," Mr. Snow redefined what that means in comments to reporters at an economic summit here. He said the U.S. government no longer measures the dollar's strength by its market value against the other major currencies -- the long-accepted premise of that policy. Instead, Mr. Snow said "strong" refers to such aspects of the dollar as the confidence it inspires in the public and its resistance to counterfeiting.
The administration's new strategy carries both large potential benefits and risks for the U.S. economy. Currency traders carefully parse Mr. Snow's words, and his comments could trigger another sell off in the already-weakened dollar.
A falling dollar could aid the U.S. economy at this moment by staving off deflationary pressures and by helping ailing manufacturers compete against foreign companies. But it could hurt, too, if it were to fall too far too fast, and frighten foreign investors away from U.S. stocks and bonds.
Mr. Snow's comments came Saturday after a meeting with his counterparts from the Group of Eight major industrialized nations.
After a week of roiling foreign-exchange markets with cryptic comments about the dollar, Mr. Snow was asked by reporters here to define what "strong" means to him. Mr. Snow replied: "You want people to have confidence in your currency. You want them to see the currency as a good medium of exchange. You want the currency to be a good store of value. You want it to be something people are willing to hold. You want it hard to counterfeit, like our new $20 bill. Those are the qualities."
More important than what he said was what he didn't say. Asked whether the U.S. strong-dollar policy still refers to its value against other major currencies, he paused and responded: "We're talking about these qualities that I enumerated."
Traders have speculated about whether Mr. Snow's recent remarks that appeared to retreat from the strong-dollar policies of his predecessors have been verbal slips by someone who has been Treasury secretary only 3½ months, or a calculated shift in dollar policy.
Mr. Snow made clear during the weekend that his comments haven't been an accident: "I've been careful to say what we mean by a strong dollar."
Treasury officials are nervous that the comments could trigger a disruptive plunge in the currency Monday as traders absorb the secretary's message that he no longer is offering a rhetorical brace for the dollar's value. In early trading in Tokyo markets Monday, the dollar slipped against the euro and the yen.
Chief Treasury spokesman Rob Nichols, who sat by Mr. Snow's side as the secretary spoke, hastened to tell reporters afterward that "there has been no change in policy."
But administration officials have also signaled they are comfortable with the dollar's recent decline and wouldn't object to a further slide. The dollar has lost 9.5% of its value against the Japanese yen over the past year. And the euro has gained 27% against the dollar during that period. Mr. Snow on Saturday rejected the notion that that was a dramatic, or undesirable, fall, saying the dollar's recent slide "really is a fairly modest realignment of currencies."
Because currency markets are so sensitive to perceived shifts in government policy, Treasury secretaries employ subtle changes in language to convey their intent and guide or reassure markets.
Starting in 1995 -- a year in which the dollar sank to post-World War II lows against the deutsche mark (which has since been subsumed by the euro) and the yen -- then-Treasury Secretary Robert Rubin began repeating the refrain, "a strong dollar is in the U.S. interest." From that moment, it was virtually his only public comment on the currency. He rarely took action to alter the dollar's value, but his words suggested to markets that there was an invisible floor under the currency's exchange rate.
During the late 1990s, a strong dollar encouraged cheap imports, kept inflation tame, drew global capital into the U.S., and prevented the economy from overheating. Now, however, the U.S. economy is threatened by deflation more than inflation. And far from overheating, the economy is stumbling tentatively out of recession.
Many economists believe the Rubin axiom is reversed: It is now a weak dollar that is in the U.S. interest, not a strong one. A weaker dollar lowers the relative price of American goods against foreign competitors. That makes U.S. products cheaper overseas. And by raising the prices of foreign-made goods in U.S. markets, it takes some of the downward pressure off price levels, easing the deflationary threat now worrying policy makers.
But currency markets are notoriously hard to predict --and control. One danger in Mr. Snow's strategy is that a sell off could drive the dollar down more than Mr. Snow might want. In that scenario, the foreign-capital flows that have propped up the U.S. economy over the past decade could slow, since the dollar-denominated value of portfolios held by foreign investors would fall. The loss of such capital could force up U.S. interest rates, undercut the U.S. stock market and crimp the nascent recovery.
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