- The Washington Times - Wednesday, November 17, 2004

The dollar plummeted to new lows yesterday despite a pledge from Treasury Secretary John W. Snow that President Bush will step up efforts next year to cut the U.S. budget deficit in half.

“You will see quite soon, as we get into the budget process back home, a renewed and intensified effort on this front,” Mr. Snow told reporters in London, noting that the administration expects economic growth to shrink the record $413 billion deficit to less than 3 percent of economic output or about $350 billion next year.

“We are now experiencing strong economic growth and we have excellent traction on the road to budget deficit reduction,” the Treasury secretary said after giving a speech at London’s Royal Institute of International Affairs.

Growth is “melting the deficit,” he said.

The dollar’s drop to 104 yen and $1.3036 against the euro, a record low, in New York trading yesterday showed that investors were not impressed that the administration is serious about cutting the deficit, however, since it appears it will rely primarily on projections of economic growth rather than spending restraint.

Mr. Snow said that Mr. Bush plans to push for reform in Social Security and create new tax-free personal savings accounts. Both measures are expected to increase the budget deficit.

“Prospects of significant fiscal restraint appear less likely” since Mr. Bush announced plans to increase, rather than reduce the deficits, with further tax cuts and spending plans, said Jay Bryson, economist with Wachovia Securities.

It would take a “significant fiscal correction” to convince the markets otherwise, and that is why the dollar is dropping so precipitously, he said. The dollar is down by 22 percent against all major currencies since Mr. Bush took office, and is approaching lows not seen since 1995.

Economists say that decreasing the budget deficits is the best way for the United States to reduce its $600 billion trade deficit, which has grown to dangerous levels that have precipitated financial collapse in other countries.

Most of the $1.8 billion in loans America needs each day to finance its deficits recently have come from the central banks in China and Japan. Mr. Snow dismissed suggestions yesterday that the Asian banks might move anytime soon to dump their record $2 trillion of Treasury holdings — nearly half the public debt.

Mr. Snow’s remarks, coming only days before he meets with top European and Asian leaders who have expressed concern with the rapid fall of the dollar, also unsettled markets because he appeared to dismiss the need for concerted action to stem the greenback’s slide.

“The history of efforts to impose nonmarket valuations on currencies is at best unrewarding and checkered,” he said.

At the same time, he insisted the administration is committed to a strong dollar. “No one ever devalued their way to prosperity.”

European leaders say action on the deficits is needed to prevent the dollar’s fall from turning into an all-out rout.

But Mr. Snow argued that the trade deficit “is a shared responsibility” and is partly due to sub-par growth in Europe.

“Economic expansion is not as balanced as it could be,” he said. “Investment opportunities in the U.S. are growing at a rate in excess of our savings, while for Europe the opposite is true. … Those partners need to grow to address this gap.”

He singled out France’s pension system, Italy’s tax system and Japan’s banking and retail sectors as areas that need reform.

“This is all of us acknowledging the share of responsibility we have to make the world a better place, to create more even growth across the globe.”

Mr. Snow said more flexible currencies in China, which fixes its currency to the dollar, and the rest of Asia is needed to foster stronger growth. “There is broad agreement today that the world economy is best served by open, competitive currency markets.”

The dollar’s steepest fall has been against the euro because the Asian countries — with whom the U.S. has its largest trade deficits — prop up the dollar to make their exports cheaper and more attractive in the prime U.S. market.

Japanese authorities indicated yesterday that they might intervene as the dollar breached 104 yen, saying they were watching closely.

Their support has prevented the dollar’s fall from spilling over into the U.S. bond market and driving up interest rates. Japan is the largest foreign holder of U.S. Treasury securities with $722 billion as of August, according to the Treasury Department.

U.S. manufacturers have been pleased with the dollar’s decline, which helped to spark a recovery from a deep industrial recession in the last year.

“The U.S. dollar is not becoming too weak,” declared Frank Vargo, vice president at the National Association of Manufacturers, noting that it remains 10 percent higher than lows set in 1995.

Europeans, Canadians and Australians are right to be concerned, however, he said, since the Asian interventions have forced their currencies to bear the brunt of the dollar’s adjustment. The dollar hit a 12-year low against the Canadian dollar yesterday.

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