Three Things the US Can Do To Stop the Dollar's Decline

Since 2001, four consecutive Treasury secretaries have made "a strong dollar policy" the cornerstone of their rhetoric on the U.S. currency. Over that period of time, the currency has lost nearly a fifth of its value. Hint to the current Treasury secretary: it's not working.

Here are three ways Federal Reserve and the Treasury could stop the dollar's decline without changing current policy too much. (Note the emphasis on "current.")

Item #1: Change the rhetoric.

The Treasury secretary needs to make clear to markets that a steady decline of the dollar is not acceptable to the government. Such a signal, presenting the fear that the dollar could reverse course, could change the one-way downward trade in the dollar, which exacerbates the fall.

That might make it less likely traders enter so confidently into carry trades, where they borrow dollars and buy assets in other currencies.

Item #2: Build a credible plan to reduce deficits.

Steve Liesman
CNBC Senior Economics
Reporter

Current projections from the administration show deficits coming down but almost no one believes them. And those forecasets don't see the deficit as a percent of GDP coming down to 3 percent, the sustainable level, in the next decade.

In the budgeting round, if not sooner, the administration needs to spell out very specifically how it will get to 3 percent and lower as soon as possible.

One symbolic way to provide confidence: dedicate the unspent tens of billions from TARP to deficit reduction, not additional stimulus.

Item #3: Coordinate policy with Europeans and other foreign central banks.

One reason for declining currencies is expected differences in interest rates. The world came together to coordinate interest rate cuts during the crisis.

Video: CNBC's Steve Liesman provides his ideas for what the Fed and the Treasury can do to save the dollar.

Fed chairman Ben Bernanke and ECB President Jean Claude Trichet could suggest publicly that they intend to coordinate rates on the way up. They need to be careful not to be seen ceding sovereignty, but they could easily do that while suggesting the two central banks — indeed all central banks — will be mindful of each other in their exit strategies.

Fed chairman Ben Bernanke is set to speak next week to the Economic Club of New York, often a place where Fed chairmen make important comments on the economy. I have no idea if Bernanke will comment on the dollar.

He has from time to time. It could be a place and a time, if indeed he is interested in stopping the slide, to step forward and reverse the fortunes of the beleaguered greenback.

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