Paulson at Treasury-Don't Expect Major Change in Dollar Policy

Article excerpt

WHEN THE WHITE HOUSE announced that Henry Paulson, CEO of Goldman Sachs, would succeed John Snow as Treasury Secretary, the dollar rallied a bit in the wake of the news. The appointment, subject to Senate confirmation, evoked memories of Robert Rubin, another Goldman Sachs alumnus, who, as Treasury Secretary in the Clinton administration, was architect of the "strong dollar policy."

It is important for a modern Treasury Secretary to have Wall Street experience, because that experience gives individuals keen insights into the interdependence of the U.S. economy with the rest of the world. However, we do not believe Paulson's nomination--sound as it is--has major implications for the dollar.

Rubin's "strong dollar policy" was important when it was implemented in the late 1990s. The strength of the dollar in the 1990s helped to constrain growth in exports, and the Clinton administration was feeling political pressure to throw a bone to exporters by taking steps to weaken the dollar. However, by repeating the mantra at every possible occasion that "a strong dollar is in the U.S. national interest," Rubin was signaling that the U.S. Treasury would not intervene in the foreign exchange market to weaken the greenback. This policy gave foreign investors confidence that they could continue to send capital to the United States without the fear that heir investments could be debased by dollar depreciation.

The Bush administration has paid lip service to the "strong dollar policy," but it has largely followed a laissez-faire approach to the greenback. …