–Retransmitting 9:56 ET Story, Updating Euro Rate

By Steven K. Beckner

(MNI) – Whatever happened to the “strong dollar” policy?

Is it significant that U.S. Treasury Secretary Timothy Geithner,
hasn’t made it a point for quite some time to utter that familiar old
boilerplate, dating back to the Clinton administration, that “a strong
dollar is in the U.S. interest?”

The last time Geithner is on record having said something to that
effect, as best can be determined, is February of this year.

One has to go back to last November, during a spate of dollar
weakness, to find vigorous assertions of the U.S. desire for a strong
greenback.

Geithner, talking to reporters in Tokyo on Nov. 11, 2009, said
“it’s very important for the U.S. and the economic health of the U.S.
that we maintain a strong dollar,”

At about that same time, even Federal Reserve Chairman Ben Bernanke
got into the act, saying on Nov. 16 that while the dollar was largely
“retracing” previous gains, the Fed was “attentive” to the dollar’s
slide and “monitoring it closely.”

Bernanke, speaking to the Economic Club of New York, said the Fed
will “guard against risks” to price stability and maximum employment
posed by a weak dollar. And he added that the Fed’s “commitment” to
those dual objectives “will help ensure that the dollar is strong.”

Then again on Dec. 15, in response to written questions from Sen.
James Bunning, R-Ky., Bernanke said the Fed would take dollar
depreciation and related commodity price rises “extremely seriously” if
they were to begin to push up consumer prices, but that the Fed’s
monetary expansion was not leading to higher inflation or inflation
expectations.

But of course that was a different time. The U.S. economy seemed to
many as if it were on track for a fairly vigorous recovery. The gross
domestic product, as it turned out, grew a real 5.0% in the fourth
quarter of last year. And most of the talk was about how soon the Fed
would implement an “exit strategy” from quantitative easing and raise
interest rates.

A strong dollar seemed not just fitting, but inevitable.

Since then, GDP growth has fallen off markedly, and unemployment
has stayed near 10%.

And so now we’ve gone eight months without a “strong dollar”
utterance from Geithner. It’s not as if he hasn’t made other currency
pronouncements. He has repeatedly pressured China to let its currency
rise against the dollar.

Possibly, this is because Geithner simply hasn’t been asked whether
that policy remains in force. But one has to assume that if he had
wanted to get the word out that the “strong dollar” policy remained in
force he could have found a way to do so.

The reality is that long before Geithner stopped reaffiriming the
“strong dollar” policy ad nauseum, that jargon had become virtually a
dead letter.

To be sure, the dollar has had its moments of strength this year.
At the height of the European sovereign debt crisis back in the Spring,
the “safe haven” status of dollar-denominated U.S. Treasury securities
insured that it would appreciate. By June, the euro had fallen below
$1.20.

That wasn’t the only thing going on, though. During most of the
first half much of the speculation was about when the Fed would be
raising rates or otherwise tightening policy. And that presumably helped
bolster the dollar.

But the longer term trend of the dollar has been to depreciate. And
that downtrend has been largely accepted, with a wink and a nod, even
when U.S. officials were repeating that they had a “strong dollar”
policy.

Geithner and his predecessors may have been mouthing “strong
dollar,” but the real policy was one of benign neglect — a willing
acceptance of long-term dollar depreciation both at the Treasury and at
the Fed — so long as it was not “disorderly.”

Why? Because it was recognized that a slowly declining dollar was
essential to reduce the U.S. trade deficit — or, to put it more
high-mindedly, reduce “global imbalances.” The International Monetary
Fund even gave its tacit blessing.

What’s more, a weaker dollar is one channel through which economic
stimulus can flow to an economy that has steadily slowed since the
fourth quarter of last year. At a time of near zero interest rates, with
little room for additional monetary or fiscal stimulus, a weaker dollar
tends to boost exports — without, so far, any inflationary price to pay
on the import side.

As MNI’s Vicki Schmelzer reported Wednesday, the dollar has been in
a slide since Bernanke opened the door to a resumption of quantitative
easing in his Aug. 27 speech to the Kansas City Fed’s Jackson Hole
symposium. The euro Thursday broke over $1.40 and is widely expected to
go higher.

But it would be a mistake to confuse effect with intent. Bernanke’s
purpose was not to talk down the dollar. Nor would the purpose of
renewed quantitative easing be to drive down the dollar, though it could
have that effect.

The dollar is seldom if ever a major factor in U.S. monetary
policy, although its value and movement is certainly taken into account
by the Fed in the making of policy.

There might be more of an argument that Geithner is encouraging the
dollar’s depreciation by refraining from “strong dollar” comments while
continually pushing China to let the yuan (and in turn other Asian
currencies) to rise against the dollar.

Then again, his silence may just be a long overdue recognition that
repeating “strong dollar” at every opportunity sounds a bit silly when
everyone knows that, for now at least, U.S. fundamentals, including not
just zero rates and stagnant growth but also mounting debt problems,
dictate a weaker U.S. currency over time.

** Market News International **

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