- The Washington Times - Friday, May 30, 2003

The dollar rallied yesterday as President Bush pledged his support for a strong American currency and signs emerged that the U.S. economy is on the mend.

The greenback strengthened to $1.177 against the euro from a near-record low of $1.19 in New York trading.

Pressure was mounting on Mr. Bush to stabilize the rapidly falling currency before he meets this weekend with Japanese and European leaders at a Group of Eight conference in France.

The president plans to spend one day at the meeting, but told reporters late Thursday that he will use the occasion to “reiterate our strong-dollar policy.” That policy had fallen into doubt in the past month as a result of statements by Treasury Secretary John W. Snow.

German Chancellor Gerhard Schroeder complained yesterday that the euro’s rise against the dollar is hurting German exports at a time when Germany, Europe’s largest economy, might be sinking back into recession.

Meanwhile, the Bank of Japan reported that it has spent a record $33.5 billion this month trying to keep the dollar from falling too quickly against the yen. Japanese Prime Minister Junichiro Koizumi told European newspapers that the dollar is too weak and that he might raise the issue at the G-8 meeting.

“If one looks at the performance of the Japanese economy, the yen should be weaker,” Mr. Koizumi said.

Exports of cars and other products to the United States are Japan’s biggest source of economic growth. Those exports have been hurt by the dollar’s 10 percent fall against the Japanese currency in the past year.

Although Japan’s economy, like that of Europe, has experienced little growth in recent months and appears close to recession, yesterday brought more signs that the U.S. economy is beginning to emerge from a deep slump.

A report on manufacturing in the Chicago region showed growth for the first time in two months. The news raised optimism that the hard-hit industrial sector is starting to revive, thanks in part to the 13 percent drop of the dollar against other major currencies since February 2002.

Hopes for a revival of consumer spending also were fed by reports showing a solid increase in consumer sentiment this month and a better performance by consumers during the war in Iraq than previously estimated.

Consumer spending declined by 0.1 percent in April, the month the war ended, but jumped by a healthy 0.8 percent in March at the onset of the war, the Commerce Department reported.

The strong March gain in consumer spending was the principal reason the government on Thursday increased its estimate of growth during the first quarter of the year, to 1.9 percent from 1.5 percent.

When combined with reports earlier this week showing big increases in home sales, the new Commerce figures suggest that consumers, the main engine of economic growth, are in better shape than many economists believed.

“Recent news has been encouraging,” said Peter E. Kretzmer, economist with Banc of America Securities, noting that consumers will have more ability to spend as Bush-backed tax cuts of $350 billion put more disposable income in their pockets.

Business profits also are rising after a long drought, increasing by 10.6 percent in the first quarter and giving businesses the cash they need to start spending and hiring again, he said.

The signs of steady improvement in the economy yesterday fueled a rally in the stock market as well as the dollar, enabling Wall Street to post a third straight month of gains for the first time since late 2001. The Dow Jones Industrial Average rose by 139 points, to 8,850.

Although the outlook brightened this week, some analysts say a further drop in the dollar is needed to nurture manufacturing back to health and ensure a long-lasting economic recovery.

Dollar traders said they do not expect Mr. Bush’s comments to produce more than a temporary lull in the dollar’s fall. Mr. Snow has made it clear that the United States is not willing to intervene in the markets by buying dollars to support the currency.

John Makin, resident scholar at the American Enterprise Institute, said the Bush administration wants a weaker dollar to spur growth. The administration has moved in concert with the Federal Reserve to achieve that goal, he said, since it became clear that the economy was not rebounding quickly from the war and that Mr. Bush’s tax cuts would be pared back significantly by Congress.

The Fed estimates that a 10 percent drop in the dollar spurs a 0.4 percentage-point increase in growth in the first year after the dollar’s decline and an additional 1.2 percentage-point increase in growth in the second year. That makes the softer dollar the most powerful tool at the administration’s disposal, Mr. Makin said.

“Given that a persistent decline in the dollar got under way only in September 2002, it is pretty clear that a continued drop in the dollar would be required to help growth in 2004, an election year,” he said.

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