TIMOTHY F. GEITHNER stood before an audience in New York on Tuesday and repeated the time-honored credo of the American treasury secretary. “Our policy has been and will always be . . . that a strong dollar is in our interest as a country,” he said. “We will never embrace a strategy of trying to weaken our currency to try to gain economic advantage.”
Mr. Geithner sounded like he meant it, but he has a problem: The markets don’t believe him. The last week has seen rapid acceleration in the dollar’s decline against other major currencies, to levels not touched since the 2008 panic. On net, currency traders are now “shorting” — betting against — the U.S. dollar. Some repercussions of a cheaper dollar are good for the United States — a boost in exports, for example. But other effects hurt — a surge in petroleum and food prices, more expensive imports and, potentially, a broader loss of confidence in what has for generations served as the world’s reserve currency.
Alas for Mr. Geithner, markets are less interested in his views on this matter than those of the Federal Reserve chairman, Ben S. Bernanke. That’s because Mr. Bernanke controls the world’s supply of dollars, which he has been expanding dramatically since the financial crisis hit in 2008. Most controversial was the Fed’s $600 billion Treasury-bond-buying program that began in October and still has two months to run.
Mr. Bernanke took these extraordinary measures to prevent a financial collapse whose consequences might have included a second Great Depression. And it seems clear that the Fed’s actions have indeed extinguished the threat of a deflationary spiral.
But lately, financial experts and ordinary citizens have been focusing on the possible side effects of Mr. Bernanke’s remedy, which may include creating so many dollars, each with less purchasing power, that the buck no longer works as a global store of value.
We’re not predicting that will happen; no plausible alternative to the dollar as a reserve currency has emerged and none is likely to do so in the foreseeable future. But it’s also probably true that a run on the dollar, if it happens, would come unexpectedly. The signs of late — from a threatened credit-agency downgrade of U.S. federal debt, to the dumping of Treasury bonds by the giant Pimco hedge fund, to rising inflation in dollar-pegged China — are cause for concern.
So it is appropriate that Mr. Bernanke plans to leave a meeting of the Fed’s policy-setting committee Wednesday and take questions from the media at the first public news conference for a sitting Fed chairman. This is his opportunity to answer the Fed’s critics and reassure markets that their residual confidence in the dollar is not misplaced.
To be sure, Mr. Bernanke can’t talk up the dollar explicitly — that’s Mr. Geithner’s job. But he can explain what he knows that markets don’t. In particular, he needs to explain, clearly and convincingly, why inflation is not a present danger despite the run-up in oil and commodity prices. He needs to reiterate, clearly and convincingly, that the Fed will never try to pay down the U.S. national debt by printing money, and that it has a credible “exit strategy” from its recent monetary easing — starting with the scheduled end of the asset-buying program known as “QE2” in June. From Main Street to Wall Street, economic confidence is running low; here’s Mr. Bernanke’s chance to supply some.