May 15 (Bloomberg) -- 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 lower.
``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 retreat.
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 the yen.
Let Markets Rule
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 aide.
``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 greater flexibility.
G-7 Turning Point
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's 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.
Adams's Message
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, the better.''
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 2004.
``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 since 2001.
Central Banks' Role
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.
Veering From Script
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 each remark.
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.''
To contact the reporters on this story:
Kevin Carmichael in Washington at kcarmichael@bloomberg.net
