|Newly Defined 'Strong Dollar' Signals Change in U.S. Policy
Treasury Chief Snow's Strategy Stresses Confidence
Rather Than Market Value
By MICHAEL M. PHILLIPS
Staff Reporter of THE WALL STREET JOURNAL
DEAUVILLE, France -- The Bush administration has abandoned the
eight-year-old U.S. strategy of verbally supporting a "strong" dollar in
foreign-exchange markets, Treasury Secretary John Snow indicated during
While insisting the U.S. still has a "strong-dollar policy," Mr. Snow
redefined what that means in comments to reporters at an economic summit
here. He said the U.S. government no longer measures the dollar's
strength by its market value against the other major currencies -- the
long-accepted premise of that policy. Instead, Mr. Snow said "strong"
refers to such aspects of the dollar as the confidence it inspires in
the public and its resistance to counterfeiting.
The administration's new strategy carries both large potential benefits
and risks for the U.S. economy. Currency traders carefully parse Mr.
Snow's words, and his comments could trigger another selloff in the
A falling dollar could aid the U.S. economy at this moment by staving
off deflationary pressures and by helping ailing manufacturers compete
against foreign companies. But it could hurt, too, if it were to fall
too far too fast, and frighten foreign investors away from U.S. stocks
Mr. Snow's comments came Saturday after a meeting with his counterparts
from the Group of Eight major industrialized nations.
After a week of roiling foreign-exchange markets with cryptic comments
about the dollar, Mr. Snow was asked by reporters here to define what
"strong" means to him. Mr. Snow replied: "You want people to have
confidence in your currency. You want them to see the currency as a good
medium of exchange. You want the currency to be a good store of value.
You want it to be something people are willing to hold. You want it hard
to counterfeit, like our new $20 bill. Those are the qualities."
More important than what he said was what he didn't say. Asked whether
the U.S. strong-dollar policy still refers to its value against other
major currencies, he paused and responded: "We're talking about these
qualities that I enumerated."
Traders have speculated about whether Mr. Snow's recent remarks that
appeared to retreat from the strong-dollar policies of his predecessors
have been verbal slips by someone who has been Treasury secretary only
3½ months, or a calculated shift in dollar policy.
Mr. Snow made clear during the weekend that his comments haven't been an
accident: "I've been careful to say what we mean by a strong dollar."
Treasury officials are nervous that the comments could trigger a
disruptive plunge in the currency Monday as traders absorb the
secretary's message that he no longer is offering a rhetorical brace for
the dollar's value. In early trading in Tokyo markets Monday, the dollar
slipped against the euro and the yen.
Chief Treasury spokesman Rob Nichols, who sat by Mr. Snow's side as the
secretary spoke, hastened to tell reporters afterward that "there has
been no change in policy."
But administration officials have also signaled they are comfortable
with the dollar's recent decline and wouldn't object to a further slide.
The dollar has lost 9.5% of its value against the Japanese yen over the
past year. And the euro has gained 27% against the dollar during that
period. Mr. Snow on Saturday rejected the notion that that was a
dramatic, or undesirable, fall, saying the dollar's recent slide "really
is a fairly modest realignment of currencies."
Because currency markets are so sensitive to perceived shifts in
government policy, Treasury secretaries employ subtle changes in
language to convey their intent and guide or reassure markets.
Starting in 1995 -- a year in which the dollar sank to post-World War II
lows against the deutsche mark (which has since been subsumed by the
euro) and the yen -- then-Treasury Secretary Robert Rubin began
repeating the refrain, "a strong dollar is in the U.S. interest." From
that moment, it was virtually his only public comment on the currency.
He rarely took action to alter the dollar's value, but his words
suggested to markets that there was an invisible floor under the
currency's exchange rate.
During the late 1990s, a strong dollar encouraged cheap imports, kept
inflation tame, drew global capital into the U.S., and prevented the
economy from overheating. Now, however, the U.S. economy is threatened
by deflation more than inflation. And far from overheating, the economy
is stumbling tentatively out of recession.
Many economists believe the Rubin axiom is reversed: It is now a weak
dollar that is in the U.S. interest, not a strong one. A weaker dollar
lowers the relative price of American goods against foreign competitors.
That makes U.S. products cheaper overseas. And by raising the prices of
foreign-made goods in U.S. markets, it takes some of the downward
pressure off price levels, easing the deflationary threat now worrying
But currency markets are notoriously hard to predict -- and control. One
danger in Mr. Snow's strategy is that a selloff could drive the dollar
down more than Mr. Snow might want. In that scenario, the
foreign-capital flows that have propped up the U.S. economy over the
past decade could slow, since the dollar-denominated value of portfolios
held by foreign investors would fall. The loss of such capital could
force up U.S. interest rates, undercut the U.S. stock market and crimp
the nascent recovery.
Write to Michael Phillips at firstname.lastname@example.org