Once again, a rookie Treasury secretary has roiled global currency markets with public comments that seemed to stray from Washington's long-standing policy of favoring a "strong dollar" -- raising questions about whether the Bush administration still backs the policy and, if so, what the policy means.
This time, it was John W. Snow, the former railroad executive billed as a more disciplined, less gaffe-prone Treasury chief than his predecessor, Paul H. O'Neill. Asked by a reporter after a congressional hearing late Tuesday whether he was worried by the dollar's decline in recent days, Snow replied that he was "not particularly concerned" and added that "the dollar is in the marketplace. Everything in the marketplace goes up some and falls some."
Those words helped cause the dollar to fall yesterday to $1.10 per euro for the first time in nearly four years. And even after the Treasury scrambled to assert that Snow remains committed to the strong-dollar policy he embraced in his Jan. 28 Senate confirmation hearing, market participants were deeply divided about the episode's importance.
Some traders concluded that Snow's comments revealed the administration's true preference to see a continued drop in the dollar -- which has already lost about 20 percent of its value against the euro in the past 12 months -- because a cheaper dollar makes U.S. exports more competitive against foreign-made goods. Others concurred with Treasury officials' explanations that the secretary had made an offhand comment with no policy implications.
But there was little dispute that the tempest taught Snow a lesson about the impact his words can have -- a lesson he was widely assumed to have learned from O'Neill's experience.
"This is part of his education about how to deal with the markets," said David Solin, managing partner at Foreign Exchange Analytics. "I think he realizes now that the only thing he can really say is the old statement, 'I support a strong dollar' " -- as his predecessors, starting with the Clinton administration's Robert E. Rubin, have repeated for nearly eight years.
Snow took pains to set the record straight yesterday at a ceremony providing his signature for use on the Series 2003 dollar bills. "While I'm speaking of the currency, let me reiterate my support again for the strong dollar," he said. By late afternoon, the dollar had recouped some of its lost ground, changing hands at $1.0970 per euro. Against other currencies, the dollar ended at 117.31 yen, down from 117.91 the day before, and it fell more than a full percentage point against the British pound.
Although the Treasury's swift damage control helped reassure many in the markets that the strong-dollar policy is intact, it left some key questions unanswered -- specifically, whether the Bush team views the policy as anything more than rhetoric or whether, as some suspect, it has a "weak strong-dollar policy."
When Rubin first declared in 1995 that "a strong dollar is in America's interest," the words were clearly intended to push the dollar higher. The dollar had plunged to record lows against the yen, and the Treasury, fearful of an uncontrolled slide in the U.S. currency, marshaled several dollar-buying interventions in concert with other nations.
Even after the dollar recovered later in the 1990s, Rubin and his successor, Lawrence H. Summers, held to the strong-dollar wording with only minor modifications. That didn't mean they wanted the dollar to rise forever; an excessively high greenback can severely erode the ability of U.S. manufacturers to compete in global markets. But Rubin and Summers believed that any significant wavering in their position risked undermining confidence in the United States as a haven for foreign investment, which would in turn send markets diving and interest rates soaring.
The Bush administration has bought into that philosophy. But one significant difference, according to officials of both the previous and current administrations, is that under O'Neill and Snow, the Treasury has a powerful aversion toward intervention in currency markets, even more so than Rubin and Summers, who resorted to intervention infrequently. The threat of intervention helped keep major currencies from moving too far in one direction or another during the Rubin-Summers years, some colleagues of the two men argue, and the markets now perceive it to be less of a threat.
"I think this administration fundamentally believes that currency rates should be set by the markets, and they are therefore disinclined to intervene under all but the most exigent circumstances," said Daniel K. Tarullo, who served as international economic adviser in the Clinton White House.
Snow's aides did not dispute that assessment, noting that in a television interview earlier this month, Snow said, "The value of the dollar is best set in open, competitive currency markets in which interventions are kept to a minimum."
But there is another notable difference between the two administrations, Tarullo added: "I don't think that this Treasury has been as good at articulating its position in a consistent fashion as it might have been."