`Committee to Save the Dollar' May Not Be Needed: William Pesek

Commentary by William Pesek

Aug. 29 (Bloomberg) -- So, the dollar isn't on its own.

That's the upshot of a Nikkei newspaper scoop yesterday that European, Japanese and U.S. officials in mid-March drew up plans to strengthen the U.S. currency following troubles at Bear Stearns Cos. Assuming the report is correct, such an effort might be dubbed ``The Committee to Save the Dollar.''

It would be the currency-market equivalent of the ``The Committee to Save the World.'' That term was coined in February 1999 by Time magazine when it splashed Alan Greenspan, Robert Rubin and Lawrence Summers on its cover. Time credited them with ending a global crisis that began in Thailand in July 1997.

Thailand, of course, is again in a state of chaos. Yet the eyes of the world haven't been on the Thai baht this year, but a dollar seemingly in freefall. In July, the dollar declined to $1.6038 per euro, the lowest since the euro's inception in 1999.

That was then. The euro is down 9 percent versus the dollar since mid-July, making any meetings of the Committee to Save the Dollar, or global moves to intervene in markets, less necessary.

``The risk would appear to have diminished as markets have come to realize that Europe's economy is weakening,'' says Paul Donovan, deputy head of global economics at UBS AG in London.

Japan's is slowing, too. The world's second-largest economy contracted an annualized 2.4 percent last quarter, raising the chances of a recession. Weakening growth also increases the odds the Bank of Japan will cut its 0.5 percent benchmark rate.

Why Now?

The dollar isn't doing better because the U.S. outlook is brightening. Rather, economies -- such as Japan's and those in the euro area -- that were forecast to hold their ground are losing pace. The Federal Reserve, meanwhile, isn't expected to cut rates with the U.S. consumer-price index up 5.6 percent for the 12 months ended in July.

The thing about the Nikkei's unnamed-source story is that it was both surprising and utterly predictable. It was surprising because it had traders wondering why officials would leak such news now. Why not three months ago when the dollar was sliding?

One possibility is that policy makers want the dollar's recovery to continue. Knowledge of an agreement to stabilize markets, says Naomi Fink, a senior currency analyst at Bank of Tokyo-Mitsubishi UFJ Ltd. in Tokyo, ``could be a disincentive for runaway dollar-selling speculation.''

Credit Crisis

The report was also predictable because, well, one would hope policy makers were mulling responses to the dollar. That may be what Fed Chairman Ben Bernanke was trying to convey in June when he said the central bank was ``attentive'' to the currency's effect on inflation expectations. Central bankers never mention exchange rates casually.

Many were equally attentive to how the dollar's drop was helping to boost oil prices. Commodity-price inflation makes it difficult for Asian central banks to cut interest rates to support growth. The quickest solution is to stop the dollar from falling, a dynamic that might reverse the increase in oil prices.

None of this means the dollar won't plunge anew if the global credit crunch worsens. For the moment, though, the need for some kind of Plaza Accord-like currency deal has been reduced. That's good news for nations concerned that further declines in the dollar will shake up the global economy.

Asia's problems run deeper than the dollar. Between slowing growth, inflation, political instability and troubles in credit markets, economic officials have their hands full.

Pakistan's Woes

Nowhere is that truer than Pakistan, which yesterday imposed emergency trading limits to halt a slide in stocks that sent the benchmark index down 42 percent since April. It was the second attempt in two months to restore confidence in a market battered by political upheaval, and it's unlikely to help.

A rigged market wouldn't work for a stable economy, never mind one rocked by a political crisis. Far from restoring calm, the ouster of President Pervez Musharraf and the breakup of the coalition government have only spooked investors.

Should fresh turmoil flare up elsewhere, markets will be looking out for assertive actions from the biggest economies.

According to Nikkei, the March plan would have the U.S. Treasury Department, Japan's Finance Ministry and the European Central Bank directing the purchase of dollars and the sale of euros and yen. Japan would provide the yen needed for currency swaps if the dollar dropped significantly.

The three groups, which considered making an emergency statement through the Group of Seven industrialized nations, didn't stipulate a specific exchange rate for the potential move, nor did they detail how much money would be used, Nikkei said.

The good news is that such a plan probably exists. The bad news is that there's no guarantee the Committee to Save the Dollar will be able to rescue it.

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net