- The Washington Times - Monday, October 20, 2003

Treasury Secretary John W. Snow sparked a surge in interest rates and the dollar yesterday by telling the Times of London he would be “frustrated and concerned” if interest rates didn’t rise as a result of the recovery in the U.S. economy.

“Higher interest rates are an indication of a strengthening economy,” Mr. Snow told the newspaper in an interview over the weekend. “I’d be frustrated and concerned if there were not some upward movement in rates.”

Because Mr. Snow, like other Treasury secretaries, meets regularly with Federal Reserve Chairman Alan Greenspan, traders on Wall Street and around the world assumed he has privileged information about the Fed’s plans and sent interest rates soaring. The rates on 10-year Treasury notes surged as high as 4.45 percent in Tokyo trading from 4.39 percent on Friday, with short-term Treasury rates climbing even higher.

But spokesmen for the Treasury and White House, seeking to calm the markets, insisted Mr. Snow was only making an observation about the way market interest rates naturally respond when economic growth picks up, and was not alluding to the Fed in any way. The pains they took to explain Mr. Snow’s comments suggested he had made a gaffe of the sort that gained notoriety for his predecessor, Paul O’Neill.

Whatever the intent, the flap was short-lived as far as interest rates are concerned. By the end of New York trading yesterday, bond rates had retraced their weekend rise, apparently soothed by talk from Fed officials that inflation is not a concern and by a small decline in the Index of Leading Economic Indicators that suggests the summer’s torrid economic growth will cool some this fall.

Some Wall Street observers were not so sure Mr. Snow spoke inadvertently. They noted that his comments came after a lot of publicity this weekend surrounding President Bush’s trip to Asia during which he urged China, Japan and other Asian nations to stop propping up the dollar to gain a competitive advantage for their exports.

The flurry of presidential activity threatened to cause further drops in the dollar, which already had plunged from 120.55 against the yen on July 31 to as low as 108.66 yen on Oct. 10. Some analysts said Mr. Snow may have been intending to put a floor under the dollar and stabilize the currency in light of the danger the dollar’s fall poses to economic growth in Asia.

Mr. Snow bolstered that impression by stressing in his interview with the Times of London that he was not trying to talk down the dollar when he orchestrated a Group of Seven communique on Sept. 20 that triggered the most recent round of dollar declines.

That assertion, combined with his prediction of higher interest rates, which naturally support the dollar, spurred a big jump in the American currency yesterday to 110.22 yen in New York trading from 109.38 on Friday.

The greenback, which already was on the rebound as reports in the last week showed the U.S. economy grew at between 6 percent and 7 percent this past summer, also advanced against the euro to $1.1659 from $1.1679 on Friday.

Driving home a point heard often on the Asian trip, Japanese Prime Minister Junichiro Koizumi warned yesterday that further declines in the dollar would pose a threat to economic recovery not only in Asia but the rest of the world. That is because the United States remains the largest market for most countries’ exports. Europe, among others, has depended heavily on exports to the United States for growth in recent years.

Lawrence Kudlow of Kudlow & Co., a Republican commentator concerned about the recent drubbing taken by the dollar, said he believes Mr. Snow has had a change of heart.

“Instead of a true confrontational battle with Japan and China, forcing them to appreciate their currencies, Mr. Snow now asserts that a steady and strong dollar is fine by him,” he said.

“In fact, a combination of stronger U.S. economic growth on the back of lower tax rates and easier money, along with the unbelievable rise in U.S. business profits and productivity, suggests the strong likelihood that both the U.S. dollar and real interest rates will in fact rise next year. It will all be part of the recovery process,” Mr. Kudlow said.

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