 |
|
December
17, 2002, 8:00 a.m.
Dollar
Direction?
Washington’s
silence implies neglect.
|
|
 he
combination of new economic leadership in Washington, the U.S. recovery,
and a tax cut will keep the current dollar weakness in check — but
once again there is confusion out there when it comes to the greenback.
This
is the same pattern we saw April through July, when dollar weakness and
Washington statements about the dollar coincided with another big tumble
in U.S. equities. Dollar weakness culminated in the July 23 S&P low
of 798.
The same pattern
of dollar weakness also occurred at the beginning of the Bush administration
when the market speculated that incoming Treasury Secretary Paul O'Neill
would favor a weak dollar. For example, the euro strengthened from 84
cents per euro in early November 2000 to 95 cents in early January. The
euro then gave up all the gains, falling below 84 cents in July 2001 on
evidence that the U.S. economy was not as weak as foreign economies as
well as denials about a weak-dollar policy.
Dollar weakness complicates
the international outlook. Foreign markets were down hard last week, partly
in response to dollar weakness. Germany is worried about deflation, so
euro strength doesn't help its double dip. Japan is already in a long
deflation, and yen strength only makes it worse.
Dollar weakness also
gives dollar-linked China a trading advantage over its non-linked neighbors
like Korea and Taiwan, exacerbating the global trade imbalance with China
and threatening to weaken other Asian economies. China's dollar link should
continue, creating a strong argument against competitive devaluation of
the dollar.
Washington's silence
on the dollar implies neglect and causes costly uncertainty. And while
Washington's new economic leadership is not likely to have a weak-dollar
policy — that would run the risk of a capital outflow, higher interest
rates, a dollar crash, and 2004 election difficulties — the situation
will be much more comfortable when the president or his new Treasury secretary
actually states a policy.
The dollar should
strengthen some in 2003, with the pace depending on progress with Iraq
and U.S. economic strength. But in the meantime, policymakers should be
clear on the fact that a "strong and stable" dollar makes more
sense than a weak-dollar policy (which is inflationary) or the Rubin position
of an ever-strengthening dollar (which was deflationary).
—
Mr. Malpass is the Chief International Economist for Bear Stearns.
|
<% dim printurl
printurl = Request.ServerVariables("URL")%>
