The Dollar Deluge; the Bush Team Signals That Its 'Strong Dollar' Policy Will Be a Reflection of Its Military Policy: Ideological and Unilateral

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Byline: Jeffrey E. Garten (Jeffrey E. Garten is dean of the Yale School of Management.)

There was one telling sign about U.S. Treasury Secretary John Snow's trip to Europe this past week. Everywhere he went he reaffirmed that the Bush administration supported a strong dollar. But while traders and investors from Wall Street, London, Tokyo, Hong Kong and elsewhere listened intently to Snow's every word, they weren't convinced by his mantra. Fact is, as Snow made his way from Dublin to Berlin, with interim stops in London and Warsaw, the greenback dropped against the euro, the British pound, the Swiss franc, the Polish zlotys, the Japanese yen, the South Korean won and the Canadian dollar. Meanwhile the price of gold, a classic hedge against the dollar, reached a 16-year high.

There are at least two ways to look at Snow's words and the global reaction to them. To begin with, no matter what the secretary says and how many times he says it, many investors and traders are skeptical, either of the Bush's commitment to a strong dollar, or of its ability to do what is necessary to achieve a strong dollar--namely restrain the U.S. budget deficit.

A second way of evaluating Snow's trip is that he left little doubt that the Bush administration would now behave in the international economic arena much as it has in the political and military sphere. It would speak confidently if not arrogantly, and it would not shy away from pressing its strong ideology around the globe. It would invite other countries to participate in its plans, but in the end it would move ahead with or without them. Its dollar policy will be a mirror of its Iraq policy. For a world hoping to see signs of a new, more diplomatic American approach in Bush's second term, these are disappointing signals.

Snow has been attempting a delicate balancing act on behalf of the Bush administration, and whether or not he is successful will be known only during the coming months. But the risks are mounting that world markets will not cooperate. In a speech to bankers in Frankfurt on Friday, Federal Reserve Chairman Alan Greenspan warned that foreign investors could soon decide that U.S. interest rates (and returns on their money) were too low, and that a depreciating dollar would continue to erode the value of their U.S. holdings; they might then reduce their exposure. His comments sent the dollar plummeting further, to record lows against the euro and the yen.

On one hand, officials like Snow are trying to convince global financiers that despite America's huge budget and trade deficits, Washington's policies are on track to achieve both strong economic growth and a narrowing of America's international borrowing requirements. Those requirements are nearing $2 billion per day, which is about 75 percent of all the savings generated by countries in Asia and Europe from their trade surpluses.

On the other hand, U.S. officials are exhorting the world to work in unison to achieve a more balanced and robust global economy. Snow's plan, as outlined to an audience at London's Royal Institute of International Affairs last Wednesday: (1) increase savings in the United States so it can reduce its foreign borrowing; (2) expand growth in Europe and Asia, so that these regions can import more from America and take pressure off U.S. trade deficits; and (3) ensure that Asian countries such as China, Japan and South Korea do not hold their currencies artificially low by selling them in massive amounts to purchase dollars. Were Asian governments to allow their currencies to float upward, Snow's reasoning goes, the dollar would become weaker against them and stimulate more American exports. "The [U.S.] current account is a shared responsibility," Snow said.

Translation: the U.S. wants others to clean up the mess it has made. Indeed, since 2001, foreign financiers have seen federal projections swing from a 10-year surplus of more than $5 trillion to a deficit of more than $2 trillion, a swing of $7 trillion. …