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July
18, 2002, 8:45 a.m.
Mum
on Money
While
euro parity is no big deal, the dollar needs some vocal advocacy.
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 he
yen and euro strengthened further against the dollar earlier this week
(the euro even passed the dollar at 1.01 dollars per euro), and this kept
continued strong downward pressure on the U.S. stock market. That there
were no dollar-supportive comments from Washington didn't help matters
any.
While
Fed Chairman Alan Greenspan did comment on the dollar in his congressional
testimony Tuesday, he did not address the future supply of dollars —
which is critical in determining the dollar's value. More, Greenspan didn't
give any sense that he disapproves of the wild fluctuations in the value
of the dollar in recent years.
On the forecasting
of exchange rates, Greenspan said that the Fed would keep out of that
business. "It is really remarkable how difficult it is to forecast
(exchange rates)," he said, "which is another way of saying
how successful the markets have become in absorbing the knowledge that
everyone has about supply and demand for currency, supply and demand for
goods and services, imports and exports." However, the markets don't
really have that much concrete knowledge about the future supply of currency,
leaving the dollar unstable and momentum-driven.
Greenspan also distanced
the Fed from a position on the new euro parity, saying, "The particular
issue of what the actual exchange-rate number is is wholly arbitrary.
So that the fact that it is above or less than 1.0 has no economic significance
whatsoever."
Truth be told, parity
itself is not significant (remember the hullabaloo about Dow 10,000 and
Nasdaq 5,000). But the perception of a weakening dollar trend as it passes
through milestones like euro parity is where there's continued concern.
Washington's silence on the importance of currency stability is causing
needless uncertainty about the future value of the dollar. The last official
statement on the dollar was the President's June 26 comment: "The
dollar will seek its level based upon market forces and based upon whether
our country can rein in spending, recover, and revitalize our manufacturing
base." Markets interpreted this as a weak-dollar policy. The yen
has strengthened by 5% since then, and the euro by 3%.
Financial markets
should not be expected to set the value of the dollar. Washington has
a 100% iron-clad monopoly on the supply of dollars and therefore has an
immense influence on its value. A simple statement that "currency
stability is at the core of an economic growth program" would go
a long way toward rebuilding investor confidence.
—
Mr.
Malpass is the Chief International Economist for Bear Stearns.
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