November 21, 2007 / 6:24 AM / in 11 years

Weak dollar not yet a factor in U.S. election

WASHINGTON (Reuters) - One month after President George W. Bush took office in 2001, his administration learned the hard way there was little to be gained from speaking out about the value of the U.S. dollar.

A customer counts U.S. banknotes at a money changer in Jakarta August 22, 2005. One month after President George W. Bush took office in 2001, his administration learned the hard way there was little to be gained from speaking out about the value of the U.S. dollar. REUTERS/Beawiharta

Bush’s first Treasury Secretary, Paul O’Neill, roiled global financial markets when he appeared to back away from the government’s long-held support for a strong dollar.

So big was the storm in financial markets that O’Neill called a news conference to avow support for a robust dollar and promise that if his policy ever changed, he would rent out New York’s Yankee Stadium to make the announcement so there could be no mistaking his message.

As the 2008 U.S. presidential campaign picks up steam, the candidates vying to succeed Bush have had little to say about the plummeting dollar, which is down more than 30 percent since O’Neill’s comments and has tumbled sharply in recent weeks.

That could change. The 2001 incident underscores the risk of discussing the subject but analysts said candidates may have more to say about the currency were the U.S. economy to weaken further.

“The dollar’s softness is a metaphor for the weakness in the overall economy,” said Greg Valliere, chief Washington strategist at Stanford Policy Research. “By next fall, people may conclude that the dollar’s fall is a loss of prestige.”

Valliere said he could envision Democrats eventually highlighting the dollar’s woes to attack the handling of the economy by the Bush administration and Republicans.

Larry Sabato, a political scientist at the University of Virginia, voiced skepticism the dollar would garner a lot of campaign attention. For most Americans, who rarely travel abroad, the bigger economic concerns are higher gasoline prices or the mortgage market’s woes.

“It’s esoteric,” Sabato said. “If a candidate were to go out on the trail and say, ‘Isn’t that awful about the falling dollar?’ it would go right over most people’s heads.”

Since mid-August, the dollar has slumped 8 percent against a basket of currencies. Its slide is creating headaches for U.S. trading partners such as China and the oil exporters, who have accumulated massive currency reserves that are now worth less than they once were.

IRAN, VENEZUELA

At this week’s meeting of OPEC heads of state, Iran and Venezuela called for the oil exporting group to stop pricing oil in dollars and use a basket of currencies instead.

OPEC isn’t alone in worrying about the dollar’s impact. Earlier this month, a Chinese official stoked concerns that China would curb its purchases of U.S.-linked assets.

By buying dollar-based assets, China and other surplus countries help keep U.S. interest rates low, which boosts the U.S. economy. In essence, those countries have cheaply financed a U.S. trade deficit that topped $700 billion last year.

Both the White House and Treasury stick to a careful script on the dollar. Treasury Secretary Henry Paulson rarely diverges from his mantra that a strong dollar is in U.S. interests but currency values are set by markets.

Douglas Elmendorf, a scholar at the Brookings Institution and a former Federal Reserve economist, said the dollar’s declining role may penetrate the American psyche, particularly as it relates to the trade deficit. The trouble is, any steps to prop up the currency would do more harm than good.

“From a policy standpoint, there is very little that can be done about it, and what could be done about it would be counterproductive,” he said.

Raising interest rates would make the currency more attractive to foreign exchange traders, but with the economy in danger of stalling, it could trigger a recession.

Although the currency’s softness is causing Americans to pay more for items such as imported cars, wines and cheeses, it may also boost U.S. exports and cushion the blow from a domestic slowdown.

Stephen Wayne, professor of government at Georgetown University, said the dollar’s troubles were unlikely to be a theme in the early stage of the U.S. campaign as Democratic and Republican voters pick their parties’ nominees for the November 4 election — but it could become an issue if the U.S. economy slips into recession.

“If that were the case, a Democratic nominee might decide to use the falling dollar, along with other problems in the economy, to criticize the Bush administration’s policies,” Wayne said.

Editing by Howard Goller

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