Analysis: Has the U.S. forgotten it has a strong dollar policy?

WASHINGTON Fri Apr 22, 2011 7:36am EDT

U.S. one dollar bills are displayed in this posed photograph in Toronto October 22, 2008. REUTERS/Mark Blinch

U.S. one dollar bills are displayed in this posed photograph in Toronto October 22, 2008.

Credit: Reuters/Mark Blinch

WASHINGTON (Reuters) - For years, Treasury secretaries parroted a line that the U.S. was committed to a strong dollar policy. But as the greenback slides close to all-time lows, President Barack Obama's administration has been noticeably quiet.

Treasury Secretary Tim Geithner last used "strong dollar" language in November, and a glance through his speeches and news databases shows he has had almost nothing to say on the matter since.

Meanwhile, record low interest rates, the Federal Reserve's bond buying program, staggering budget deficits and the White House's export-driven jobs policy all have contributed to the dollar's decline.

All this has a growing number of investors and currency experts thinking Washington is passively accepting a gradual decline in the currency, hoping it helps engineer a vigorous enough recovery to get a battered economy in order.

"There is no obvious evidence of that in official rhetoric or in the commentary of key officials, but de facto the United States is permitting if not aiding a deliberate dollar decline," said Allen Sinai, chief global economist for Decision Economics Inc. in Boston.

"The heart of the dollar decline," he added, stems from the super-loose monetary policy run by the Federal Reserve for more than two years as opposed to fiscal or tax policy.

"Markets aren't going to buy the dollar when you offer zero interest rates and have an economy that is growing at roughly one-third the rate of China's -- that's an easy choice for investors."

On Thursday, the dollar index, a gauge of the U.S. currency against six advanced country currencies, fell to 73.735, its lowest level since August 2008, setting up a possible run toward its record low of 70.698 touched in March 2008. The euro soared to a 16-month high above $1.46.

Geithner last year flatly denied he is pursuing a policy aimed at cheapening the dollar.

"We will never use our currency as a tool to gain competitive advantage," he told reporters last November after a meeting in Kyoto, Japan, of finance ministers from the Asia-Pacific Economic Cooperation group. "I'm happy to reaffirm again that a strong dollar's in our interest as a country."

Undeniably, though, financial markets see the dollar on a slide against other currencies that is likely to continue, in no small part because current trade policy seems to demand it.

"It's implicit in the administration's call for a doubling of exports, that can't happen without the dollar falling," said David Gilmore, a partner at FX Analytics in Essex, Connecticut.

The U.S. government's consistent pressure for a revaluation of the currency of its major trading partner, China, only underline these perceptions.

Much of the argument for the dollar's decline -- down 6.2 percent this year against that basket of six major currencies

-- comes back to the Fed's policy of keeping interest rates low to spur a fledgling recovery from the 2007-2009 financial crisis.

It's a policy that's drawn criticism from the world's new economic powerhouses in Latin America and Asia, who say U.S. monetary policy is fueling global inflation and hurting efforts to balance the global economy.

"I've noticed there's a strategy by the United States and advanced countries to increase exports and reduce their imbalances at the cost of emerging markets," Brazilian Finance Minister Guido Mantega, a former economics professor, said last year.

Strong corporate earnings reports this week showed the declining dollar has helped U.S. companies sell drugs, chemicals and food in foreign markets.

A former White House economist in the Obama administration, who requested anonymity, summed it up:

"I don't believe the U.S. is actively pushing a weak dollar policy -- but I would say this: the fact that interest rates are low and the U.S. is aggressively pushing monetary stimulus, that has the effect of depreciating the dollar," the former official said. "That is certainly a mechanism which would result in a de facto weak dollar policy."

PLAYING WITH FIRE?

There are major dangers with such a strategy, not least of which are the inflationary risks it creates.

The Fed's buying up of U.S. government debt, also known as quantitative easing, is to many the equivalent of cranking up the dollar printing presses at the central bank, devaluing the value of the currency in the process.

"When you print money or create money...it weakens the value of the dollar" and stokes potential inflation, said Representative Steve Stivers, a freshman Republican from Ohio.

The same sentiment was expressed by Republican Senator Jim DeMint, who told the Senate Banking Committee last month, "The quantitative easing, monetizing of debt, or however we term that, has caused some concern about...the long-term value of our currency."

Indeed, with U.S. gasoline pump prices soaring partly because investors have been able to borrow money cheaply in the U.S. and invest it in crude oil and other commodities, Obama has been lashing out. On Thursday, he announced that a group of federal agencies were being asked to probe fraud in the energy markets.

Of course, no Obama administration official is ever likely to officially endorse a declining dollar. There is no political upside to being a "weak dollar" president.

But analysts say allowing a slow decline in the dollar isn't a policy to be feared unless the fall turns into a rout.

"It's a necessary part of both global rebalancing and domestic rebalancing, given that the U.S. has agreed that it needs to rely less on debt-financed consumer spending and more on export-driven growth," said C. Fred Bergsten, director of the Peterson Institute think-tank in Washington.

Bergsten, a noted commentator on exchange-rate policy, noted there has been essentially a nine-year "bear market" in the dollar since 2002, aside from brief upward spurts in value when the global financial crisis struck in 2008 and again last year when Europe's debt crisis was acute.

That means a substantial amount of foreign exchange rate rebalancing has taken place, aside from a continuing disconnect between the value of fast-growing China's yuan and the dollar. Bergsten estimated the yuan remains undervalued by around 20 percent.

In financial markets, major players anticipate a continuing decline for the dollar, partly connected to skepticism that the Obama administration and opposition Republicans are anywhere near agreement on how to tame towering deficits.

"Absent problems elsewhere in the world, history and economics suggest that America's current fiscal and monetary policy stance will put continued pressures on the dollar," said Mohamed El-Erian, co-chief investment officer of top bond manager PIMCO, which has $1.2 trillion in assets under management and is betting against U.S. treasuries.

And influential investor Jim Rogers warns that investors will stop buying increasingly risky U.S. government assets even if the returns go up from current levels.

"At some point along the line, people are going to realize it's absurd to lend money to the United States government at 30 years in U.S. dollars at 3 or 4 or 5 or 6 percent interest," he told Reuters Insider.

(Additional reporting by Donna Smith, Thomas Ferraro, Mark Felsenthal and Jennifer Ablan in New York, editing by Kristin Roberts and Martin Howell)