Mark Gilbert: U.S. is happily devaluing its way out of its trade deficit

Treasury Secretary Snow Laughs Off Dollar's Drop

By Mark Gilbert
Bloomberg News Service
Wednesday, November 17, 2004

a href=http://quote.bloomberg.com/apps/news?http://quote.bloomberg.com/apps/new...
pid=10000039amp;refer=columnist_gilbertamp;sid=abKpiT.R8.6k

quot;The history of efforts to impose non-market valuations
on currencies is at best unrewarding and checkeredquot;
was U.S. Treasury Secretary John Snow's response
today to a question about whether the U.S. might join
with other countries in a bid to arrest the dollar's
decline.

The currency market quickly parsed Snow's comment,
made in London at a briefing on global economies,
and came up with its own translation: quot;Sell the
dollar.quot;

Down it went, dropping to a record $1.3048 against the
euro and slumping to 104.29 against the yen. When
Bloomberg reporter Edie Lush told him his comments
were driving the dollar lower and his alleged quot;strong
dollarquot; policy wasn't working, Snow chuckled. quot;The
policy is the policy,quot; he said.

Snow, looking scarily like Jack Nicholson in his role
as the Joker in the quot;Batmanquot; movie, is laughing all
the way to narrower deficits. His lips said, quot;No one
ever devalued their way to prosperity.quot; But his eyes
seemed to be saying, quot;There's no way I'm bailing out
a bunch of cheese-eating surrender monkeys who
can't even lick their trade unions into shape.quot;

The U.S. currency continues to disregard every piece
of good news that would typically drive it higher. It
ignored yesterday's figures showing U.S. producer
prices jumped 1.7 percent last month, their biggest
surge in 14 years. It ignored U.S. Treasury figures
showing international investors bought a net $63.4
billion of U.S. assets in September, the most since
June.

And it ignored the latest comment from the Federal
Reserve flagging its intention to keep pushing the
benchmark U.S. interest rate higher. quot;There is
certainly more ground to cover,quot; Chicago Fed
President Michael Moskow told his local chamber
of commerce yesterday.

In contrast, there's little prospect of an interest
rate increase from the European Central Bank in coming
months, with growth slumping to 0.3 percent in the
third quarter for the 12 nations that use the euro.
The Fed has doubled its overnight target rate to 2
percent this year, so the benchmark rates in the
United States and Europe are level for now. Even
with the prospect of a widening gap that should
promise higher returns on dollar deposits, the U.S.
currency isn't rallying.

That's because currency traders are growing more
convinced that the Fed is as happy as the U.S.
government to watch the dollar drop. quot;The issue for
the Fed is getting the Fed funds rate back up so
they can cut it again in future if they need to,quot; says
Steve Major, global head of fixed-income strategy at
HSBC Holdings Plc in London. quot;A weaker dollar
allows them to do that.quot;

Asked by Heidi Crebo-Rediker of Bear Stearns Cos.
how he expected overseas holders of U.S. Treasuries
to react to the losses the dollar will inflict on their
investments, Snow segued into a long joke, the
punch line of which was quot;no comment.quot; That's not
funny when international investors own $1.9 trillion
of the $3.8 trillion of marketable U.S. Treasury
securities.

So far the U.S. government has been able to feed
its $55 billion-per-month addiction to the foreign
capital needed to fund the current-account deficit
by relying on overseas purchases of its bonds.
Yesterday's figures showed international investors
bought $19.2 billion of government debt in
September, up from $14.6 billion in the previous
month.

The figures also showed that Japan dumped Treasuries
for the first month since October 2002, with net sales
of $1.5 billion.

Maybe Japanese investors have been listening to the
chorus of Fed officials warning that U.S. economic
policies threaten the health of the Treasury market.
Yesterday it was the turn of Philadelphia Fed
President Anthony Santomero to caution that quot;the
issue of how a cyclically balanced budget will be
restored introduces another element of uncertainty
in the outlook.quot;

Tim Bond, the global head of rates strategy at
Barclays Capital in London, says it's quot;an odd timequot;
for the Fed to embrace a weaker dollar as a means
of slimming the current-account deficit, given
worries about the government's enthusiasm for
more tax cuts.

quot;A suspicion lurks that the renewed emphasis on
the current account position betrays an attempt to
remove the source of temptation -- ultra-cheap
foreign financing -- before the politicians manage
to enact some truly disastrous policies,quot; Bond
wrote in a research note yesterday.

With every grin, every shrug of the shoulders, every
elusive response to perfectly straightforward questions,
Snow told Europe and Japan that a weaker dollar is
just fine by him. Strong growth, he said, is what will
narrow the U.S. trade gap from last year's record
$496.5 billion, and the current account deficit from
the $166.2 billion reached in the second quarter.

What he meant was: The United States is happily
devaluing its way to an improved deficit position.

--------

Mark Gilbert is a columnist for Bloomberg News
Service.

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