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Bush bid weaken dollar against asia { September 24 2003 } Original Source Link: (May no longer be active)
http://www.washingtonpost.com/wp-dyn/articles/A54874-2003Sep23.htmlhttp://www.washingtonpost.com/wp-dyn/articles/A54874-2003Sep23.html
Gambling With the Dollar?
Bush Bid to Weaken Currency Could Backfire, Some Say
By Jonathan Weisman
Washington Post Staff Writer
Wednesday, September 24, 2003; Page E01
The Bush administration has embarked on a high-stakes effort to reduce the value of the dollar in Asia, hoping to stimulate exports and jump-start the U.S. job market but risking a sudden spike in interest rates and an eventual slide on the stock market.
For weeks, top administration officials have publicly pushed China and Japan to allow their currencies to strengthen against the dollar. Its campaign culminated over the weekend when the United States persuaded finance ministers of the seven major industrial countries to issue a communique calling for more flexible exchange-rate policies, effectively pressuring China and Japan to stop practices that depress the value of their currencies.
The impact was swift and dramatic. The Japanese yen and the European Union's euro soared in value against the dollar Monday. China's currency does not trade freely. By yesterday, the yen had risen to its highest level since December 2000 before falling back; it rose again in early trading today. The euro reached an eight-week high against the dollar Monday but then stabilized yesterday.
U.S. stock prices rose yesterday on speculation that a weak dollar would boost international demand for American goods, but the price of Treasury securities fell, raising interest rates.
To manufacturers, the sudden weakening of the dollar was a welcome sight because it meant the price of U.S.-made products would fall abroad while the prices of foreign goods would rise in the United States. Franklin J. Vargo, a longtime Commerce Department official who is now the National Association of Manufacturers' vice president for international economic affairs, marveled at the U.S.-orchestrated communique that was released at the Group of Seven conference in Dubai, United Arab Emirates.
"To an old bureaucrat like me reading this, I thought it was a formidable and important statement," he said.
Treasury officials said more flexible exchange rates in Asia should begin shrinking the U.S. trade deficit, which is expected to reach a record level this year.
But some international economists accused the administration of subjecting the world economy to significant risks for the short-term political benefit of appearing to take manufacturers' concerns seriously.
"It's domestic politics -- that's the long and short of it," said Daniel K. Tarullo, a Georgetown University law professor who was President Bill Clinton's senior international economic adviser. "This is the administration's effort to deflect attention from the hemorrhaging of manufacturing jobs from the United States by trying to place all the blame on other countries."
The risk, critics say, is that currency traders will dump dollars on the market, pushing it to dangerously low levels and eventually lowering the international value of other American investments, such as stocks and corporate bonds. If international investors lose money on dollar-denominated securities because of the currency exchange rates, they might reduce their purchases of U.S. securities. That means the United States would have to offer higher interest rates on its bonds to attract international buyers, raising the cost of financing the burgeoning budget deficit, expected to top $500 billion next year. And, because rates on mortgages and car loans are tied to Treasury bond rates, those, too, could rise.
A stronger yen could also endanger the nascent recovery of the Japanese economy, the world's second-largest national economy, by making its exports more expensive.
The administration's fiscal policies came under criticism yesterday in Dubai at the annual meetings of the International Monetary Fund and World Bank, despite Treasury Secretary John W. Snow's pledge to halve the budget deficit by 2008. The administration has yet to propose any policy changes to make that happen, and IMF Managing Director Horst Koehler said the United States needs a "credible framework" to back the pledge.
Ironically, the Asian currency policies being criticized by Snow have helped to soften the deficit's impact on the U.S. economy. Because countries such as Japan and China sell far more to the United States than they buy, their currencies would naturally drift higher against the dollar if their governments did not intervene by hoarding dollars. Asian nations hold $737 billion in U.S. securities, 53 percent of all foreign holdings. With $444 billion worth, Japan is the largest holder of U.S. debt. China is the third-largest, with $126 billion.
And with each month, China becomes more important to the market for Treasury securities. By the end of this year, the Chinese are on pace to double their Treasury holdings from the 2001 level of $79 billion, said Michael Decker, head of the Bond Market Association's research and policy division.
Those purchases have helped keep U.S. interest rates at record lows, despite the swelling budget deficit, said Nouriel Rubini, an international economist at New York University's Stern School of Business. But the Bush administration's need for Treasury purchasers could soon clash with its desire for the Asians to stop buying.
"It's a dangerous game," Rubini said. "Either you want the dollar to depreciate against Asian currencies or you want to maintain low interest rates. You can't have it both ways. It just doesn't add up."
Many economists, including critics such as Tarullo, say the likelihood of a catastrophic dollar slide or interest rate spike is slim. Treasury officials say that new customers would quickly fill any void left by a falloff in Asian buying, staving off big increases in interest rates. Vargo said the dollar has a long way to fall before it reaches a danger zone.
The dollar is still 3 percent higher than it was in July 1999, when the architect of the "strong dollar policy," Treasury Secretary Robert E. Rubin, resigned. It is 16 percent more valuable than it was in 1997, the last time the dollar's value was not distorting U.S. trade, Vargo said.
Other economists say that whatever is motivating the administration, a correction of the yawning U.S. trade deficit is needed at some point.
The G7's statement is an implicit recognition that all countries are going to have to share the burden of that correction, by opening up to U.S. goods while ending artificial price incentives that benefit their own products, said Edwin M. Truman, an international economist in the Clinton Treasury Department who is now with the Institute for International Economics.
"China and the other Asian economies could not be given a free pass on all this," he said.
But the pain of narrowing the trade gap will probably be felt at home, in higher prices and possibly declining stock markets. If the markets perceive that it is now U.S. policy to gradually reduce the value of the dollar over an extended time, U.S. investments will become less attractive and interest rates will rise to include the "risk premium" that potential buyers will demand.
By attempting to orchestrate the currency gyrations, the Bush administration has introduced a new level of uncertainty with no assured results, Truman said.
"Playing with currency is like playing with fire," he said. "Fire plays a useful purpose. It can keep you warm. But you can also get burned."
© 2003 The Washington Post Company
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