Strong Dollar

Treasury Secretary Geithner said, as recently as October 3, that “it is very important to the United States that we continue to have a strong dollar,” as reported by Bloomberg. Yet, the dollar continues to slide: 12 percentfrom its peak this year in March as measured by the Federal Reserve’s trade- weighted Real Major Currencies Dollar Index.

As of this point, investors no longer believe this rhetoric, which is standard for Treasury Secretaries:

“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.

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 problem is that the desire for the dollar to be strong is in conflict with the need to adjust to the large current account deficit. US economic recovery requires an increase in exports, and current account adjustment requires that plus reduced imports, and that requires a weak, rather than a strong dollar. Economic policies pursued to combat the recession do not induce expectations of a stronger dollar in the future.

The problem, of course, is the fundamental conflict between internal and external objectives of economic policy. To be the world's reserve currency requires sacrificing internal concerns for external ones, so that confidence in the currency is maintained. This is hard to do when we are in a deep recession.