Dollar diplomacy: Public policy calls for ‘strong’ currency, but strategy may not
By Neil Irwin,
When Treasury Secretary Timothy F. Geithner was asked last week whether the dollar’s speedy decline in recent months reflected a deliberate government strategy, he answered with the kind of language used by a generation of Treasury secretaries.
“Our policy has been and always will be, as long as at least I’m in this job, that a strong dollar is in our interest as a country,” Geithner said in a forum at the Council on Foreign Relations. “We will never embrace a strategy of trying to weaken our currency to try to gain economic advantage.”
Flash forward. Geithner will meet Monday with Chinese officials in Washington and try to persuade them to let the value of their currency rise relative to the dollar in part as a way of lifting U.S. trade. That would, by the simple math of foreign exchange markets, weaken the dollar — in pursuit of economic advantage.
This contrast reflects a fundamental contradiction in the U.S. approach toward the dollar. The government has put in place a range of policies that make the dollar likely to decline in value over time. But no one in a position of authority can really admit it, because of politics and the possibility of a bad reaction in financial markets.
In a volatile day on global financial markets Thursday, the dollar rose against the euro but fell against the yen, and prices for oil and other commodities had their steepest one-day drop in two years.
For the U.S. economy, a declining dollar creates winners and losers. A falling dollar makes U.S. manufacturers and farmers more competitive on global markets, which can help create jobs. But it also makes imported goods, such as oil, more expensive, causing consumers pain when buying gasoline or foreign-made clothing, computers and automobiles.
U.S. officials do not see their efforts to persuade China to let its currency rise as an attempt to weaken the dollar, but rather they say they want currency values to more closely reflect economic fundamentals and to reduce the imbalances in the world economy that contributed to the financial crisis.
As the dollar has declined 9 percent since November against other major currencies — a reversal of its run-up during the financial crisis — policymakers in both parties have continued to avow that a mighty dollar stands for a mighty nation.
“A strong dollar represents a strong economy and a strong country,” former Minnesota governor Tim Pawlenty, a leading candidate for the Republican presidential nomination, said in a recent Fox News interview critical of the Obama administration’s dollar policies.
A rapid decline in the dollar could diminish its role as the world’s preeminent currency — used in many international transactions and valued by investors as a safe place to store wealth — and undercut U.S. economic reach. After all, the rise of the dollar as the world’s leading currency occurred as the United States was emerging as the world’s preeminent power a century ago.
But to the people involved in making U.S. economic policy, the political emphasis on a strong dollar can be frustrating because it ignores the reality that movements in the dollar are a key way that the global economy adjusts to shifting conditions.
“People want to use it as a way to keep score,” said Tony Fratto, who helped craft official government communications about the dollar as an official in George W. Bush’s White House and Treasury Department. “Is the dollar getting weaker? That must mean we’re losing. Is it getting stronger? We must be winning. But it’s really not a very useful score card in that way.”
During a period in the mid-1980s, for example, the dollar fell 47 percent though the U.S. economy was booming and the nation was on the verge of prevailing in the Cold War. In late 2008 and early 2009, by contrast, the dollar rallied 24 percent as the U.S. economy was in free fall.
U.S. politicians often focus on the toll that a falling dollar can take. In a recent hearing before the Senate Banking Committee, Federal Reserve Chairman Ben S. Bernanke received six questions that reflected concern about the value of the dollar.
Typical of that view, Sen. Tom Coburn (R-Okla.) recently told Bloomberg Television that the administration and the Fed are “debasing the currency, which will result in significant inflation. And that is a tax increase on every middle-income family and every poor person in this country.”
Past Treasury secretaries have paid a price for being too frank about their thinking on the dollar. Paul O’Neill, in 2001, and his successor, John Snow, in 2003, both made comments about how the value of the dollar is set in world markets and reflects economic fundamentals. Each time, investors reacted by selling off dollars out of concern that the United States was preparing to let the currency’s value tumble. The public remarks created their own reality in the markets. And each time, the comments prompted political criticism that the United States was turning away from a strong dollar policy.
That explains why Geithner adapted a more cautious tone in his own recent answers. Similarly, at a news conference last week, Bernanke quickly turned to boilerplate language when asked about the dollar, saying that the Fed “believes that a strong and stable dollar is both in American interest and in the interest of the global economy.”
In practice, Bernanke’s Fed has been pursuing a pair of policies that weaken the dollar: ultra-low interest rates that make dollar investments less attractive and ambitious bond purchases that increase the supply of dollars.
But Bernanke, like Geithner, can argue that the words and deeds are not fundamentally at odds. They and their predecessors have frequently argued that steps to strengthen the U.S. economy, such as stimulating the recovery and boosting trade, will ultimately strengthen the dollar as well.
“Both Geithner and Bernanke have to comment on the dollar, and the safest phrase to use is to say ‘a strong dollar is in our interest,’ ” said David Malpass, president of the economic research firm Encima Global. “I’m not critical of their saying it, but it would be good to have a strong and stable dollar as the actual policy.”
O’Neill, who was Treasury secretary from 2001 to 2002, later spoke frankly about the strange politics of the dollar.
“When I was secretary of the Treasury I was not supposed to say anything but ‘strong dollar, strong dollar,’ ’’ O’Neill told Bloomberg Television in 2008. “I argued then and would argue now that the idea of a strong-dollar policy is a vacuous notion. . . . It implies in it that somehow we have the ability to manage the relationship between the value of the U.S. dollar and other currencies around the world.”