By Matthew Brown and Oliver Biggadike
Oct. 8 (Bloomberg) -- More than a decade after former Treasury Secretary Robert Rubin made the “strong dollar” national policy, currency traders say the same words coming from the Obama administration have little meaning.
Timothy Geithner, the current Treasury secretary, has tolerated the greenback’s 12 percent slide from its peak this year in March as measured by the Federal Reserve’s trade- weighted Real Major Currencies Dollar Index. While he said as recently as Oct. 3 that “it is very important to the United States that we continue to have a strong dollar,” the last time the U.S. intervened in markets to support its currency was 1995.
The weaker dollar may boost America’s exports as the economy recovers from the deepest recession since the 1930s. The risk is that it may also drive away America’s largest creditors just as the Treasury relies more than ever on foreign investors to buy the bonds financing Barack Obama’s stimulus spending. The dollar’s share of global currency reserves fell in the second quarter to 62.8 percent, the lowest level in at least a decade, the International Monetary Fund in Washington said on Sept. 30.
“Since the dollar has been weak and weakening for years, Geithner was using a code phrase, a carry-over from the Bush administration,” said David Malpass, president of research firm Encima Global in New York. “It means that the U.S. approves of a constantly weakening dollar but doesn’t want a disruptive collapse,” said Malpass, the former chief economist at Bear Stearns Cos. and deputy assistant Treasury secretary from 1986 to 1989.
Poorer Americans
The dollar’s 15 percent decline against the euro and 11 percent depreciation versus the yen since early March are increasing concern among world leaders. At the same time, Americans are getting poorer.
Per capita net wealth tumbled to $172,749 in August from a peak of $212,599 in September 2007, government figures show. A United Nations Human Development Report released Oct. 5 showed America’s quality of life dropped to No. 13 in a 2007 global ranking from No. 5 in 2000.
European Central Bank President Jean-Claude Trichet said in Brussels on Sept. 28 that a strong dollar is “very important.” Toyoo Gyohten, an adviser to Japan’s new finance minister, said the same day there is “no better alternative to the dollar.” Bank Rossii First Deputy Chairman Alexei Ulyukayev said Sept. 29 that Russia will keep buying Treasuries because there’s no realistic alternative.
‘Special Burdens’
“We recognize that the dollar’s important role in the system conveys special burdens and responsibilities on us and we are going to do everything necessary to make sure we sustain confidence,” Geithner told reporters after attending a meeting of counterparts and central bankers from the Group of Seven in Istanbul on Oct. 3.
The comments came after policy makers from China to Russia called for an alternative to the world’s main currency in foreign-exchange reserves.
“Major reserve-currency issuing countries should take into account and balance the implications of their monetary policies for both their own economies and the world economy with a view to upholding stability of international financial markets,” China President Hu Jintao told the Group of 20 leaders in Pittsburgh on Sept. 25, according to an English translation of his prepared remarks.
When Ronald Reagan was elected president in 1980 his platform called for a “strong NATO,” “strong leadership,” “a strong peace,” and a strong currency. “A sound monetary policy will be restored -- one designed to instill confidence in the American dollar abroad, as well as bring down the rate of inflation at home,” according to a 1980 brochure from Reagan’s campaign.
Bentsen, Rubin, Summers
The preference for a strong dollar was brought back under Lloyd Bentsen, Bill Clinton’s Treasury secretary, in 1994 and the phrase was used regularly by his successors, Robert Rubin, a former Goldman, Sachs & Co. co-chairman, and Lawrence Summers, who is now the director of Obama’s National Economic Council.
Intercontinental Exchange Inc.’s Dollar Index, which tracks the currency’s performance against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, gained an average of 4.93 percent a year between 1996 and 1999 when Clinton was in office.
“By not varying the statement, an issue never arose about whether a comment involved a subtle change or not in the policy toward the dollar,” former Fed Chairman Alan Greenspan told his colleagues on the Federal Open Market Committee in 2001, according to a transcript of the meeting. “It was boring, it was dull, it was repetitive, it was nonintellectual, and it worked like a charm.”
Rubin Mantra
Rubin, a former senior counselor at New York-based Citigroup Inc., wasn’t immediately available to comment. A spokesman for Summers referred questions to the Treasury.
During the presidency of George W. Bush, the Dollar Index declined 20 percent.
The government has used the phrase for so long that “I don’t think it has much meaning left for the markets,” said Vassili Serebriakov, a currency strategist at Wells Fargo Bank in New York. “Once you have this policy in place I don’t think there’s any possible choice but for the Treasury to stick to what it’s been saying all this time.”
The decline means it’s becoming relatively more expensive to live in the U.S. The difference in per-capita income with Canada has shrunk 87 percent since October 2008.
A McDonald’s Corp. Big Mac sandwich cost $3.57 in the U.S. in 2009, unchanged from 2008, according to The Economist magazine’s Big Mac Index. That compares with a 13 percent decline in the euro region to $4.62 from $5.34, and a 19 percent drop in the U.K. to $3.69.
Rising Exports
One benefit to a depreciating dollar is that it helped shrink America’s trade deficit to $32 billion in July from the record $67.6 billion in August 2006, data compiled by the Commerce Department show.
Exports rose 5.7 percent to $127.6 billion in July from the low this year of $120.6 billion in April, the most recent data show, led by sales of capital goods including cars, civilian aircraft and computers, as well as stronger demand for industrial supplies and consumer goods.
“The Washington theory is that dollar weakness will benefit the U.S. by inflating our way out of debt and causing more exports,” Encima’s Malpass said in a Sept. 25 note to clients. “The problem with this theory is that it assumes capital stays put while the dollar devalues.”
While the dollar dropped in global currency reserves, holdings of euros rose to a record, the IMF report shows. The U.S. currency’s portion declined to 62.8 percent from 65 percent in the first quarter. The euro’s share rose to a record 27.5 percent from 25.9 percent while the pound and yen gained.
$11.6 Trillion
The share of reserves in dollars declined even after the Fed and the government lent, spent or guaranteed $11.6 trillion to shore up the economy and the financial system. The Fed has increased the size of its balance sheet to $2.144 trillion from $906 billion in September 2008.
Treasury officials rely on foreign investors to buy the record amount of debt needed to finance the more than $1 trillion budget deficit. The gap will grow to $1.6 trillion in fiscal 2010 before narrowing to $1.4 trillion the following year, according to the Congressional Budget Office.
The U.S. sold $1.517 trillion of notes and bonds this year, compared with $585 billion at the same point in 2008. London- based Barclays Plc forecast total 2009 issuance at $2.1 trillion, and $2.5 trillion in 2010.
Dollar bears say net purchases of long-term U.S. securities by foreign investors fell below the trade deficit by $46 billion in the first half of the year, one of the only three occasions since 1994 there was a shortfall, according to Treasury Department data.
China Slows Purchases
China has slowed purchases, increasing its holdings 10 percent to $800.5 billion through July after a 52 percent rise in 2008 and 20 percent in 2007, according to the Treasury Department. Foreign ownership overall has risen 11.4 percent to $3.43 trillion, after gaining 31 percent in 2008.
Chinese Premier Wen Jiabao said in March that the Asian nation was “worried” about the safety of its investment in U.S. debt, as a weakening dollar eroded the value of its record $2.1 trillion of foreign-exchange reserves.
The Dollar Index, which was at 76.49 yesterday, is still above the lows in March 2008, when it fell to a record 70.698. The decline isn’t as steep as in the late 1980s, when it tumbled 48 percent to 85.33 in January 1988 from 164.72 in March 1985.
There’s no sign slower purchases of U.S. debt are leading to higher borrowing costs. The yield on the benchmark 10-year Treasury, which helps determine everything from mortgage rates to auto loan payments, has averaged 3.17 percent this year, compared with 5.6 percent since 1989.
No Inflation
“The dollar will fall against the euro into the year end as investors reallocate funds in search of higher yields,” said Hans-Guenter Redeker, the London-based global head of currency strategy at BNP Paribas SA, the most accurate forecaster of 2007. “This is only capital export though, not capital flight. There is no evidence whatsoever that the weak dollar will lead to capital flight.”
There is no inflation in the U.S. that would deter foreign investors from Treasuries. Consumer prices fell 1.5 percent in August from a year earlier, and have dropped for six straight months, the Labor Department in Washington said Aug. 16.
“Inflation is still declining in the U.S. so it’s wrong to say that the dollar is losing its purchasing power,” Redeker said. “The U.S. is a domestically driven economy. It has huge output gaps and these are going to keep inflation subdued for at least two years.”
G-7 Silence
G-7 finance chiefs stopped short of singling out the dollar for criticism in a statement after talks on Oct. 3, saying that “excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability.” That’s the same language they used in April, when the Dollar Index rose to 86.871.
“It’s hardly a decisive statement by the officials but at the same time it shows that they prefer the dollar steadies in the current range and they could learn to live with it,” said David Cohen, director of Asian economic forecasting at Action Economics in Singapore. “I’m sure Geithner wouldn’t mind the dollar becoming a little more competitive but he doesn’t want to threaten the dollar’s status as the reserve currency, so by definition he has to play a delicate balancing act.”
To contact the reporters on this story: Matthew Brown in London at mbrown42@bloomberg.net; Oliver Biggadike in New York at obiggadike@bloomberg.net
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