- The Washington Times - Tuesday, May 13, 2003

Treasury Secretary John W. Snow set off a fall of the dollar yesterday as investors concluded the Bush administration, with an eye to the 2004 election, is engineering a major turnaround in the currency to promote exports and economic growth.

Mr. Snow noted that the lower dollar is helping U.S. exports in an interview Sunday on ABC-TV. His comment was echoed and amplified yesterday by Commerce Undersecretary Kathleen Cooper, who said the strong dollar has hurt U.S. exports, increased the trade deficit and acted as a drag on the U.S. economy.

“Our economic performance has been affected by the widening trade gap,” she said at a Commerce Department conference on international trade, noting that the dollar’s recent big drop against the euro and other currencies brings it “closer to its long-term average” and has the benefit of giving U.S. companies better pricing power.

A Treasury spokesman insisted yesterday that Mr. Snow continues to favor a strong dollar and has not discarded the policy put in place by predecessor Robert E. Rubin in 1995.

But the administration’s protests did nothing to deter the dollar’s plunge to a new four-year low of $1.16 against the euro yesterday from near $1.15 Friday. The greenback also fell to a 10-month low of 117.40 Japanese yen from 116.86 yen Friday.

“Snow said that the weak dollar ‘helps exports,’ which we and others accept as a material rejection of the strong dollar policy that has been in effect for the past several years,” said Dennis Gartman, economist and editor of the Gartman Letter.

“Snow is making clear that a weaker dollar is beneficial for U.S. companies,” said Shahab Jalinoos, a foreign-exchange analyst at UBS Warburg. “The comments encourage the market’s entrenched view that official support for a strong dollar policy is entirely superficial.”

Mr. Snow’s comments, coming during a major campaign by the Bush administration to push its tax cuts through Congress, increasingly smack of “desperation to boost U.S. growth prospects,” Mr. Jalinoos said.

Many Wall Street analysts are predicting the dollar soon will fall to a new low of about $1.20 against the fledgling European currency.

The dollar’s decline also has been stoked by the low-interest-rate policies of the Federal Reserve, whose warning about the danger of a destructive deflationary cycle in the U.S. economy last week set off a big drop in the currency.

While Mr. Snow did not address the question of deflation, which would be a disastrous development for a president campaigning for re-election, his remarks suggest that he shares the Fed’s willingness to risk reigniting inflation by encouraging a rapidly declining dollar if the result is to revive U.S. exports, jobs and growth.

Exports are the lifeblood of the manufacturing sector, which remains in a recession that started two years ago. More than one million manufacturing jobs have been lost since the recession began, and many economists have concluded that a decline in the dollar may be the only thing that will help most industries recover.

“The weaker dollar has mostly bullish consequences for the economy, pricing and earnings in the United States,” said Edward Yardeni, chief investment strategist at Prudential Securities. It makes U.S. exports more competitive while enabling U.S. companies to raise their prices in tandem with rising import prices, plumping up profits.

Thanks to the decline of the dollar, he said, major U.S. businesses from Eastman Kodak to IBM are reporting increases in sales and profits overseas, boosting their bottom lines and giving rise to solid rallies in their stocks.

“The bad news is mostly for the strong currency countries,” he said. “In effect, the U.S. is exporting deflationary pressures to Europe,” where big exporters like DaimlerChrysler are having a harder time selling their goods to Americans because of the cheaper dollar.

A major drawback that prevented any official move to a lower dollar in the past was that it might provoke a sell-off of U.S. stocks and bonds as investors in Europe pull out of dollar-denominated assets that are rapidly decreasing in value.

But Mr. Yardeni said the drop of more than 40 percent against the euro since October 2000 and about 12 percent against other major currencies in the last year does not appear to have triggered such a massive run out of dollars.

Even with the precipitous fall of the dollar this year, stocks and bonds have continued to rally, and investment flows into the United States actually burgeoned to a record high of $563 billion in the year ended in February, Mr. Yardeni said.

Recent inflows have been stoked mainly by Asian central banks that reinvest the surplus of dollars generated by their huge trade surpluses with the United States by buying U.S. bonds and mortgage-backed securities. Because of their recycling of dollars, the U.S. currency has fallen less against Asian currencies.

“Treasury Secretary John Snow is essentially following a policy of benign neglect for the U.S. dollar, the only sensible response right now,” economist Lawrence Kudlow said.

The benefit for exporters will be clear in the months ahead, Mr. Kudlow said.


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