U.S. believed happy with decline of dollar if it's 'orderly'

By Jitendra Joshi
Agence France-Presse
Sunday, December 3, 2006

http://news.yahoo.com/s/afp/20061203/ts_afp/forexuspolitics_061203220206

The US administration appears unfazed as the dollar plummets on currency markets, giving a helpful trade boost during an economic slowdown, analysts believe.

But a danger lies in the dollar falling so far that it unleashes inflation, sparking retaliation by the Federal Reserve.

The Treasury has expressed no concern as the euro has hit 20-month highs above 1.33 dollars. The greenback is at 14-year lows against the British pound, although the US unit has held its own to the Japanese yen.

Treasury Secretary Henry Paulson's mantra is that "a strong dollar is clearly in the nation's interest" and that its value must be set on open markets. That public stand will not change, pundits say.

"If the dollar's decline becomes disorderly, if it was flying out of the window, the administration would get very concerned," said Wachovia global economist Jay Bryson.

"Not only the dollar would be going down, long-term interest rates would be spiking up and that would trigger a recession here. But as long as it remains orderly, the administration will take a position of benign neglect," he said.

University of Maryland business professor Peter Morici said "the administration would like a weaker dollar against the (Chinese) yuan, and that would likely pull it down against other Asian currencies too".

Morici, a trenchant critic of Chinese trade policies, said a more realistic dollar-yuan rate would redress some of the greenback's decline to the euro.

But he added: "The administration is speaking out of two sides of its mouth.

"It can't have a devaluation against the yuan, (South Korean) won, yen and other Asian currencies and a strong dollar. It can't have its cake and eat it too."

A dollar decline has been long anticipated, given the parlous state of the US current account. Now, a slowing economy and a suspension of Fed rate hikes seem to have brought the dollar bears truly out to play.

A weaker dollar will make US exports cheaper on foreign markets, and so will encourage the global economic rebalancing long sought by the US government to redress the record trade deficit.

On the flip side, the eurozone's economy is finally showing signs of life and more rate hikes are expected from the the European Central Bank.

But while some eurozone politicians fret over the euro rally's impact on the 12-nation area's exports, the silence in Washington is deafening.

David Kotok, chairman of Cumberland Advisors, said that Paulson is playing a delicate game after the Democrats regained control of Congress in elections last month, and as he prepares to visit China in two weeks.

"He is trying to balance protectionist pressure on one hand with slow change coming from China and other Asian countries that have large surpluses," Kotok said.

"And so we'll see an orderly transition to the global economy, not a meltdown, and the US administration will do nothing to disturb that."

However, Fed chairman Ben Bernanke said last week that US inflation remains "uncomfortably high." And it could worsen if a weaker dollar jacks up import prices in a country that remains a voracious consumer of foreign goods.

For Kotok, though, the only way the dollar could crash is if foreign central banks dump their greenback holdings. And for a country like China, with a trillion dollars in reserves, that would cause self-inflicted harm.

"Fed policy is to sustain growth just under the economy's trend potential. It won't be deflected from that unless you see a dollar meltdown, which no central bank including the Fed wants to see," he said.

"The world is not ending."

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