Is there a rift between the White House and the Treasury on U.S. dollar policy?
President Bush said yesterday on PBS’s Nightly Business Report that the dollar’s fall to record lows against the euro is bad news. He said, “Those aren’t good tidings, if you’re for a strong dollar like I am.” He also acknowledged that the weaker greenback has contributed to higher oil prices and more rapid inflation. When asked by PBS anchor Susie Gharib if he wanted a stronger dollar, the president replied, “I would, absolutely.”
Today, while gold briefly hit the $1,000 mark, and while the dollar fell to a new all-time low against the euro and slid below 100 yen for the first time in over twelve years, Treasury Secretary Henry Paulson told reporters at the National Press Club that he believes “very much that a strong dollar is in our national interest.” Confusing matters, however, the Treasury man added that U.S. long-term fundamentals “are strong, and I believe they are going to be reflected in the currency market.”
Some have come to associate Paulson’s wording with a tolerance for a weaker dollar. Others believe it’s a form of currency protectionism to spur exports. Either way, the question lingers: Are Paulson and Bush on the same page about the dollar?
There may be less here than meets the eye. While the Treasury would undoubtedly prefer a greenback rally to suppress inflation, there is a good deal of skepticism in the building that this is possible in the short-run. And there is considerable skepticism that the Europeans would lend a hand. It also must be noted that policy coordination and communication between the Treasury and the White House are very close. As a result, Bush likely didn’t break any new ground in his dollar remarks last night.
Nobody in the administration is happy with the price of oil or gold. Nor is there much glee about the pickup in inflation. This includes, by the way, today’s report that import prices are running 13.6 percent higher than February 2007 levels, and are roughly in line with the 13.8 percent import price hike registered in January.
In my conversations with various officials, I get the sense that rather than the dollar, an amelioration of the housing credit and foreclosure problem is the current number-one priority. Earlier today, Paulson announced a new set of regulations and guidelines for various players in the home-loan mortgage game. These proposals are all quite sensible in the effort to bring greater transparency, disclosure, risk awareness, and simplicity to the mortgage market.
Incidentally, the Treasury Secretary told reporters that there will be no immediate increase in capital requirements for banks and other lenders. He believes that now is the time to raise capital to meet existing requirements, in order to strengthen the financial system. Paulson also repeated his view that a huge sub-prime mortgage-loan bailout by the government simply was never on the table.
Fixing this mortgage mess is important. But at the same time the Treasury should be working to stabilize and appreciate the dollar. The same, of course, can be said of the Federal Reserve. I’d like to see some dollar diplomacy with the Group of Seven nations, difficult as that may be. I’d also like to see an occasional intervention to buy dollars. That would put traders on notice. It would indicate that this is a two-sided market. Right now, traders are fearlessly shorting the greenback and making good money doing it.
But here’s the bottom line: A stronger dollar would surely reduce inflation pressures and promote economic growth. So would a broad-based corporate tax cut, which would spark both the economy and the stock market. Alas, none of this appears likely in the foreseeable future.