October 10, 2007


U.S. affects a strong silence on its weak currency (Edmund L. Andrews, October 10, 2007, IHT)

[Treasury secretary, Henry Paulson Jr.] has repeatedly expressed satisfaction that American exports have climbed by about 15 percent in the last year, a trend that has been helped by the weaker dollar.

Analysts see little mystery in the American position: at the moment, a weaker dollar offers more benefits than a stronger one. The cheaper dollar offers a lift to American exporters by making their products competitive in many parts of the world. And while a weak dollar usually makes imports expensive, import prices have so far climbed less than other currencies' values because foreign producers have kept prices low to preserve market share in the United States.

"Implicitly, Paulson and the Federal Reserve are happy with a gradual fall in the value of the dollar," said Nouriel Roubini, an economist at New York University. "They'll never say they favor a weak dollar, but the benefits to the U.S. in terms of competitiveness are significant."

Though Paulson has primary responsibility for American exchange rate policy, Federal Reserve officials have also made it clear that they are not worried about imminent inflationary dangers from a weaker dollar.

The Fed chairman, Ben Bernanke, recently told a congressional hearing that the dollar's value remains strong in other ways. "The value of the currency can also be expressed in terms of what it can buy in domestic goods — the domestic inflation rate," Bernanke said in response to questions about the dollar from Representative Ron Paul, Republican of Texas and a long-shot candidate for the Republican presidential nomination. Noting that inflation remains low, Bernanke suggested that the dollar's weakness was not a source of concern to the Fed.

Democratic lawmakers, who have been quick to attack the Bush administration about most other economic policies, have said almost nothing about the currency's decline.

To at least some European officials, worried that the soaring value of the euro will hurt European exports, the American silence has been thunderous.

That the falling dollar has accompanied deflation would prompt re-examination of some economic assumptions were they not ideological.

Posted by Orrin Judd at October 10, 2007 6:03 AM

The dollar is cyclical versus other currencies and the cyclicality is tied most closely to interest rates. When the Fed Funds target rate goes up, the dollar does too. Conversely, when it goes down, the dollar falls.

The Treasury and the Fed are working together to reduce our trade deficit. The weaker dollar makes exports more attractive and imports relatively less attractive. Interestingly, the Asian export countries are intervening to prevent their currencies from appreciating versus the dollar in order to protect their market share here.

The Europeans are doing the opposite, keeing interest rates high and making noises about raising rates.

In 2001, a Euro cost 84 cents. Today, it's about $1.40. The decline began when the Fed cut interest rates to get us past 9-11 and the recession. When the Fed began raising rates in 2004, the dollar stabilized and then began heading south when the Fed stopped raising rates. The sharpest drop came when the Fed dropped rates on September 18th.

Posted by: Kurt Brouwer at October 10, 2007 10:16 AM

Europe has also kept rates high since 9-11 because they weren't helping in the WoT but wanted to still seem a significant global power. They made their currency artificially strong to cover genuine geo-political weakness.

Posted by: oj at October 10, 2007 11:07 AM

I think I read here that the reason people want a "strong" dollar is just that they think that "strong" must be good and "weak" must be bad.

Posted by: Ibid at October 10, 2007 2:25 PM