I-Believe-in-Strong-Dollar Turns Relic as China Begs
Oct. 8 (Bloomberg) -- More than a decade after formerTreasury Secretary Robert Rubin made the “strong dollar”national policy, currency traders say the same words coming fromthe Obama administration have little meaning.
Timothy Geithner, the current Treasury secretary, hastolerated the greenback’s 12 percent slide from its peak thisyear in March as measured by the Federal Reserve’s trade-weighted Real Major Currencies Dollar Index. While he said asrecently as Oct. 3 that “it is very important to the UnitedStates that we continue to have a strong dollar,” the last timethe U.S. intervened in markets to support its currency was 1995.
The weaker dollar may boost America’s exports as theeconomy recovers from the deepest recession since the 1930s. Therisk is that it may also drive away America’s largest creditorsjust as the Treasury relies more than ever on foreign investorsto buy the bonds financing Barack Obama’s stimulus spending. Thedollar’s share of global currency reserves fell in the secondquarter to 62.8 percent, the lowest level in at least a decade,the International Monetary Fund in Washington said on Sept. 30.
“Since the dollar has been weak and weakening for years,Geithner was using a code phrase, a carry-over from the Bushadministration,” said David Malpass, president of research firmEncima Global in New York. “It means that the U.S. approves ofa constantly weakening dollar but doesn’t want a disruptivecollapse,” said Malpass, the former chief economist at BearStearns Cos. and deputy assistant Treasury secretary from 1986to 1989.
Poorer Americans
The dollar’s 15 percent decline against the euro and 11percent depreciation versus the yen since early March areincreasing concern among world leaders. At the same time,Americans are getting poorer.
Per capita net wealth tumbled to $172,749 in August from apeak of $212,599 in September 2007, government figures show. AUnited Nations Human Development Report released Oct. 5 showedAmerica’s quality of life dropped to No. 13 in a 2007 globalranking from No. 5 in 2000.
European Central Bank President Jean-Claude Trichet saidtoday in Venice that a strong dollar is “important,” repeatingremarks made in Brussels on Sept. 28. Toyoo Gyohten, an adviserto Japan’s new finance minister, said the same day there is “nobetter alternative to the dollar.” Bank Rossii First DeputyChairman Alexei Ulyukayev said Sept. 29 that Russia will keepbuying Treasuries because there’s no realistic alternative.
The Dollar Index, which tracks the currency against sixU.S. trading partners, fell to its lowest level in almost 14months today. The greenback slid as much as 0.9 percent againstthe euro before trading at $1.4777 at 3:06 p.m. in New York.
‘Special Burdens’
“We recognize that the dollar’s important role in thesystem conveys special burdens and responsibilities on us, andwe are going to do everything necessary to make sure we sustainconfidence,” Geithner told reporters after attending a meetingof counterparts and central bankers from the Group of Seven inIstanbul on Oct. 3.
The comments came after policy makers from China to Russiacalled for an alternative to the world’s main currency inforeign-exchange reserves.
“Major reserve-currency issuing countries should take intoaccount and balance the implications of their monetary policiesfor both their own economies and the world economy with a viewto upholding stability of international financial markets,”China President Hu Jintao told the Group of 20 leaders inPittsburgh on Sept. 25, according to an English translation ofhis prepared remarks.
Bentsen, Rubin, Summers
When Ronald Reagan was elected president in 1980, hisplatform called for a “strong NATO,” “strong leadership,”“a strong peace” and a strong currency. “A sound monetarypolicy will be restored -- one designed to instill confidence inthe American dollar abroad, as well as bring down the rate ofinflation at home,” according to a 1980 brochure from Reagan’scampaign.
The preference for a strong dollar was brought back underLloyd Bentsen, Bill Clinton’s Treasury secretary, in 1994, andthe phrase was used regularly by his successors, Robert Rubin, aformer Goldman, Sachs & Co. co-chairman, and Lawrence Summers,who is now the director of Obama’s National Economic Council.
Intercontinental Exchange Inc.’s Dollar Index, which tracksthe currency’s performance against the euro, yen, pound,Canadian dollar, Swiss franc and Swedish krona, gained anaverage of 4.93 percent a year between 1996 and 1999 whenClinton was in office.
Rubin Mantra
“By not varying the statement, an issue never arose aboutwhether a comment involved a subtle change or not in the policytoward the dollar,” former Fed Chairman Alan Greenspan told hiscolleagues on the Federal Open Market Committee in 2001,according to a transcript of the meeting. “It was boring, itwas dull, it was repetitive, it was nonintellectual, and itworked like a charm.”
Rubin, a former senior counselor at New York-basedCitigroup Inc., wasn’t immediately available to comment. Aspokesman for Summers referred questions to the Treasury.
During the presidency of George W. Bush, the Dollar Indexdeclined 20 percent.
The government has used the phrase for so long that “Idon’t think it has much meaning left for the markets,” saidVassili Serebriakov, a currency strategist at Wells Fargo & Co.in New York. “Once you have this policy in place, I don’t thinkthere’s any possible choice but for the Treasury to stick towhat it’s been saying all this time.”
More Expensive
The decline means it’s becoming relatively more expensiveto live in the U.S. The difference in per-capita income withCanada has shrunk 87 percent since October 2008.
A McDonald’s Corp. Big Mac sandwich cost $3.57 in the U.S.in 2009, unchanged from 2008, according to The Economistmagazine’s Big Mac Index. That compares with a 13 percentdecline in the euro region to $4.62 from $5.34, and a 19 percentdrop in the U.K. to $3.69.
One benefit to a depreciating dollar is that it helpedshrink America’s trade deficit to $32 billion in July from therecord $67.6 billion in August 2006, data compiled by theCommerce Department show.
Exports rose 5.7 percent to $127.6 billion in July from thelow this year of $120.6 billion in April, the most recent datashow, led by sales of capital goods including cars, civilianaircraft and computers, as well as stronger demand forindustrial supplies and consumer goods.
Theory ‘Problem’
“The Washington theory is that dollar weakness willbenefit the U.S. by inflating our way out of debt and causingmore exports,” Encima’s Malpass said in a Sept. 25 note toclients. “The problem with this theory is that it assumescapital stays put while the dollar devalues.”
While the dollar dropped in global currency reserves,holdings of euros rose to a record, the IMF report shows. TheU.S. currency’s portion declined to 62.8 percent from 65 percentin the first quarter. The euro’s share rose to a record 27.5percent from 25.9 percent while the pound and yen gained.
The share of reserves in dollars declined even after theFed and the government lent, spent or guaranteed $11.6 trillionto shore up the economy and the financial system. The Fed hasincreased the size of its balance sheet to $2.144 trillion from$906 billion in September 2008.
Treasury officials rely on foreign investors to buy therecord amount of debt needed to finance the more than $1trillion budget deficit. The gap will grow to $1.6 trillion infiscal 2010 before narrowing to $1.4 trillion the followingyear, according to the Congressional Budget Office.
Treasury Sales
The U.S. sold $1.517 trillion of notes and bonds this year,compared with $585 billion at the same point in 2008. London-based Barclays Plc forecast total 2009 issuance at $2.1trillion, and $2.5 trillion in 2010.
Dollar bears say net purchases of long-term U.S. securitiesby foreign investors fell below the trade deficit by $46 billionin the first half of the year, one of the only three occasionssince 1994 there was a shortfall, according to TreasuryDepartment data.
China has slowed purchases, increasing its holdings 10percent to $800.5 billion through July after a 52 percent risein 2008 and 20 percent in 2007, according to the TreasuryDepartment. Foreign ownership overall has risen 11.4 percent to$3.43 trillion, after gaining 31 percent in 2008.
Chinese Premier Wen Jiabao said in March that the Asiannation was “worried” about the safety of its investment inU.S. debt, as a weakening dollar eroded the value of its record$2.1 trillion of foreign-exchange reserves.
Dollar Index
The Dollar Index traded as low as 75.767 today, still abovethe lows in March 2008, when it fell to a record 70.698. Thedecline isn’t as steep as in the late 1980s, when it tumbled 48percent to 85.33 in January 1988 from 164.72 in March 1985.
There’s no sign slower purchases of U.S. debt are leadingto higher borrowing costs. The yield on the benchmark 10-yearTreasury, which helps determine everything from mortgage ratesto auto loan payments, has averaged 3.17 percent this year,compared with 5.6 percent since 1989.
“The dollar will fall against the euro into the year-endas investors reallocate funds in search of higher yields,” saidHans-Guenter Redeker, the London-based global head of currencystrategy at BNP Paribas SA, the most accurate forecaster of2007. “This is only capital export though, not capital flight.There is no evidence whatsoever that the weak dollar will leadto capital flight.”
No Inflation
There is no inflation in the U.S. that would deter foreigninvestors from Treasuries. Consumer prices fell 1.5 percent inAugust from a year earlier, and have dropped for six straightmonths, the Labor Department in Washington said Aug. 16.
“Inflation is still declining in the U.S., so it’s wrongto say that the dollar is losing its purchasing power,” Redekersaid. “The U.S. is a domestically driven economy. It has hugeoutput gaps, and these are going to keep inflation subdued forat least two years.”
G-7 finance chiefs stopped short of singling out the dollarfor criticism in a statement after talks on Oct. 3, saying that“excess volatility and disorderly movements in exchange rateshave adverse implications for economic and financialstability.” That’s the same language they used in April, whenthe Dollar Index rose to 86.871.
“You can definitely read a worry among the non-U.S.participants in the G-7 meeting about the stance of U.S.authorities, and whether there’s any meaning to the strong-dollar policy,” said Carl Hammer, a senior global analyst atSEB AB in Stockholm. “Behind the scenes, there are definitelymore deliberations and pressure for seeing the U.S. being reallyoutspoken in defending its strong-dollar policy.”
To contact the reporters on this story:Matthew Brown in London at mbrown42@bloomberg.net;Oliver Biggadike in New York at obiggadike@bloomberg.net
Last Updated: October 8, 2009 15:19 EDTSource: Bloomberg
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