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U.S. Goes Along With Dollar's Fall to Ease Trade Gap
Quiet Acquiescence Holds
Possible Risks for Economy;
Surge in Exports in March
By MICHAEL M. PHILLIPS and SHAHID SHAH
May 13, 2006; Page A1
WASHINGTON -- The Bush administration is quietly acquiescing in the dollar's recent slide, a potentially risky approach but one it hopes may gently narrow the yawning U.S. trade gap by realigning world currencies.
On Friday, government data showed that gap shrank in March. The Commerce Department said the monthly U.S. trade deficit narrowed to $62 billion, the smallest figure in seven months, spurred by record exports and an import bill that dropped somewhat despite high oil prices.
MORE
Economists' comments on the trade report.
* * *
Read the complete text of Friday's economic reports, and analysis from Briefing.com:
• International trade -- Commerce Department; Briefing.com
• Import prices -- Labor Department; Briefing.com
The administration hopes a falling dollar eventually will help the trend, by making U.S. exports cheaper for foreigners and goods made abroad more expensive for Americans. The dollar began falling late last year. Since the start of April, its drop has accelerated against a variety of currencies, from the euro to the yen.
But backing currency depreciation can be tricky. The dollar's slow slide could become a steep plunge if markets turn against it -- particularly if investors fear that U.S. officials are trying to engineer a drop. That's why the administration isn't calling attention to its stance, except for attempts to press China and its neighbors to strengthen their currencies.
A falling currency also adds to inflationary pressure at home. Fear of that effect increasingly is rattling financial markets. The Labor Department said on Friday that U.S. import prices rose 2.1% in April after two straight months of declines -- though the boost was due largely to a rise in petroleum prices, not currency shifts.
America's current-account deficit, the gap on trade and investment income, measured a record 6.4% of gross domestic product last year. That deficit is considered a potential drag on economic growth -- and possible political issue in an election year.
Treasury Secretary John Snow and other members of President Bush's economic team see continued dollar weakness -- combined with stronger economic growth abroad -- helping curb the trade deficit, according to people familiar with the administration's thinking.
"If we're going to get our trade deficit down to manageable proportions, it's hard to see how that could happen without a very substantial depreciation of the dollar, and that means against most currencies," says Princeton University economist Alan Blinder, a former vice chairman of the Federal Reserve Board.
Economists warn that it takes time for shifting foreign-exchange rates to make their way into order books for exports and imports. But growth has picked up in Japan and other countries overseas, and overall U.S. sales to foreigners of everything from soybeans to software are on the rise. Excluding the volatile sales of aircraft and petroleum products, exports surged to $76.5 billion in March, up 13.8% from a year earlier.
'Exports Are Improving'
"There's no question exports are improving," says Ian Shepherdson, chief U.S. economist for High Frequency Economics, an independent research firm based in Valhalla, N.Y. He credits "strong growth outside the U.S. and a bit of dollar weakening, maybe."
Macroeconomic Advisers, a St. Louis economic-research firm, forecasts that the trade deficit will widen through September, then shrink at least through the end of next year. The effect of a weaker dollar initially will be "small, but it gathers steam in early 2007," says Ken Matheny, a senior economist at the company.
The Bush administration's approach demands a delicate bit of financial diplomacy. With currency traders highly sensitive to any perceived shift in government policy, Mr. Snow must be careful to avoid remarks that either halt the dollar's slow decline or inadvertently push it into a freefall that could further drive up U.S. interest rates, scare away foreign investors worried about a plunge in dollar-denominated assets and slow the economy.
"The difficulty is it's impossible to say anything intelligent about exchange rates without risking being misunderstood and possibly causing exchange-rate volatility," says Kristin Forbes, a Massachusetts Institute of Technology economist and former aide to Mr. Bush. Even the failure to speak out against the dollar's decline could provoke a sharp market response.
Mr. Snow has opted for a multipronged approach: He has kept almost mum regarding the dollar's overall value, while actively seeking to weaken it against the Chinese yuan and currencies from other areas of East Asia that are running big trade surpluses with the U.S. He also has been hectoring Japan and Europe to take steps -- such as loosening labor protections -- that could speed their economic growth.
To keep from stirring overall currency markets too much, Mr. Snow has stuck to a variation of the strong-dollar mantra crafted by the Clinton administration, an anodyne statement at a time when markets are convinced that Treasury doesn't want the dollar to strengthen. "A strong dollar is in our nation's interest, and currency values should be determined in open and competitive markets in response to underlying economic fundamentals," Mr. Snow said Wednesday.
That same day, the dollar hit a 28-year low against the Canadian dollar and a nine-year low against the South Korean won. Both the British pound, which traded at $1.8909 mid-afternoon yesterday and the euro, which bought $1.2885, are the strongest they've been in a year against the dollar. Measured against a Federal Reserve index of 19 major currencies, the dollar had slipped to 81.28 Friday from 85.17 in March.
One reason the dollar is feeling pressure is a growing sense in markets that the Federal Reserve may soon pause in its campaign to raise interest rates, while central banks in Europe and Japan may be lifting their rates in the near future. Economists say that higher interest rates tend to strengthen a country's currency because they draw in more investment.
Mr. Snow and his team are naturally suspicious of the idea that governments can or should meddle with exchange rates except in extreme cases.
Still, the protectionist sentiment sweeping Congress has forced the secretary to be more overt in his efforts to persuade China to allow the yuan to rise in relation to the dollar. The U.S. posted a $15.6 billion deficit with China in March, up from $12.9 billion a year earlier and by far the country's single largest bilateral trade gap.
U.S. exports to China rose during the period, to $4.96 billion from $3.31 billion, amid increased shipments of U.S.-made semiconductors and aircraft. But the increase was overwhelmed by a $5.29 billion surge in imports from China, to $47.321 billion, led by computers, computer parts and cellphones.
Chinese officials have vowed to take steps to help correct the imbalance. Early last month, Chinese officials went on a buying spree in the U.S., signing long-term deals to coincide with President Hu Jintao's visit to Washington. They've also promised to take steps to increase domestic demand in China for U.S.-made goods. But it may take months, in some cases years, for those pledges to translate into actual trade.
Exchange rates have been the main focus of bilateral tension. This past week, Mr. Snow said he was "extremely dissatisfied" that China, which has taken some steps to make its rigid exchange rate more flexible, hasn't gone further.
Mr. Snow argues such a move would benefit China's red-hot economy by helping it avoid a sudden crash. He also predicts that it would ripple through the other nations of East Asia that are keeping their currencies weak against the dollar and exporting heavily to the U.S. Implicit in his statement is a desire for a broad depreciation of the U.S. dollar against the currencies of the major economies of East Asia.
Even so, Treasury officials couch their desire in such terms as "adjusting" or "flexibility." They don't talk about a falling dollar.
Limited Ability
The U.S. has limited ability to sway currency prices, whether through action or inaction. Last month, Mr. Snow orchestrated a joint statement of the Group of Seven major industrialized nations calling for "greater exchange-rate flexibility" in China and elsewhere in Asia.
Not long afterward, Japanese Finance Minister Sadakazu Tanigaki, who had signed off on the statement, appeared to back away by talking down the yen and -- by implication touting the dollar. "The G7 statement does not call for a depreciation of the dollar," he said at this month's meeting of the Asian Development Bank in India. "I'm worried that the market has misunderstood the G7."
Mr. Snow's top international hand, Undersecretary for International Affairs Tim Adams, immediately fired back. "We should allow markets to set the values of exchange rates, and probably we should all refrain from not only intervening but commenting on exchange rates," he said at the same meeting
U.S. Goes Along With Dollar's Fall to Ease Trade Gap
Quiet Acquiescence Holds
Possible Risks for Economy;
Surge in Exports in March
By MICHAEL M. PHILLIPS and SHAHID SHAH
May 13, 2006; Page A1
WASHINGTON -- The Bush administration is quietly acquiescing in the dollar's recent slide, a potentially risky approach but one it hopes may gently narrow the yawning U.S. trade gap by realigning world currencies.
On Friday, government data showed that gap shrank in March. The Commerce Department said the monthly U.S. trade deficit narrowed to $62 billion, the smallest figure in seven months, spurred by record exports and an import bill that dropped somewhat despite high oil prices.
MORE
Economists' comments on the trade report.
* * *
Read the complete text of Friday's economic reports, and analysis from Briefing.com:
• International trade -- Commerce Department; Briefing.com
• Import prices -- Labor Department; Briefing.com
The administration hopes a falling dollar eventually will help the trend, by making U.S. exports cheaper for foreigners and goods made abroad more expensive for Americans. The dollar began falling late last year. Since the start of April, its drop has accelerated against a variety of currencies, from the euro to the yen.
But backing currency depreciation can be tricky. The dollar's slow slide could become a steep plunge if markets turn against it -- particularly if investors fear that U.S. officials are trying to engineer a drop. That's why the administration isn't calling attention to its stance, except for attempts to press China and its neighbors to strengthen their currencies.
A falling currency also adds to inflationary pressure at home. Fear of that effect increasingly is rattling financial markets. The Labor Department said on Friday that U.S. import prices rose 2.1% in April after two straight months of declines -- though the boost was due largely to a rise in petroleum prices, not currency shifts.
America's current-account deficit, the gap on trade and investment income, measured a record 6.4% of gross domestic product last year. That deficit is considered a potential drag on economic growth -- and possible political issue in an election year.
Treasury Secretary John Snow and other members of President Bush's economic team see continued dollar weakness -- combined with stronger economic growth abroad -- helping curb the trade deficit, according to people familiar with the administration's thinking.
"If we're going to get our trade deficit down to manageable proportions, it's hard to see how that could happen without a very substantial depreciation of the dollar, and that means against most currencies," says Princeton University economist Alan Blinder, a former vice chairman of the Federal Reserve Board.
Economists warn that it takes time for shifting foreign-exchange rates to make their way into order books for exports and imports. But growth has picked up in Japan and other countries overseas, and overall U.S. sales to foreigners of everything from soybeans to software are on the rise. Excluding the volatile sales of aircraft and petroleum products, exports surged to $76.5 billion in March, up 13.8% from a year earlier.
'Exports Are Improving'
"There's no question exports are improving," says Ian Shepherdson, chief U.S. economist for High Frequency Economics, an independent research firm based in Valhalla, N.Y. He credits "strong growth outside the U.S. and a bit of dollar weakening, maybe."
Macroeconomic Advisers, a St. Louis economic-research firm, forecasts that the trade deficit will widen through September, then shrink at least through the end of next year. The effect of a weaker dollar initially will be "small, but it gathers steam in early 2007," says Ken Matheny, a senior economist at the company.
The Bush administration's approach demands a delicate bit of financial diplomacy. With currency traders highly sensitive to any perceived shift in government policy, Mr. Snow must be careful to avoid remarks that either halt the dollar's slow decline or inadvertently push it into a freefall that could further drive up U.S. interest rates, scare away foreign investors worried about a plunge in dollar-denominated assets and slow the economy.
"The difficulty is it's impossible to say anything intelligent about exchange rates without risking being misunderstood and possibly causing exchange-rate volatility," says Kristin Forbes, a Massachusetts Institute of Technology economist and former aide to Mr. Bush. Even the failure to speak out against the dollar's decline could provoke a sharp market response.
Mr. Snow has opted for a multipronged approach: He has kept almost mum regarding the dollar's overall value, while actively seeking to weaken it against the Chinese yuan and currencies from other areas of East Asia that are running big trade surpluses with the U.S. He also has been hectoring Japan and Europe to take steps -- such as loosening labor protections -- that could speed their economic growth.
To keep from stirring overall currency markets too much, Mr. Snow has stuck to a variation of the strong-dollar mantra crafted by the Clinton administration, an anodyne statement at a time when markets are convinced that Treasury doesn't want the dollar to strengthen. "A strong dollar is in our nation's interest, and currency values should be determined in open and competitive markets in response to underlying economic fundamentals," Mr. Snow said Wednesday.
That same day, the dollar hit a 28-year low against the Canadian dollar and a nine-year low against the South Korean won. Both the British pound, which traded at $1.8909 mid-afternoon yesterday and the euro, which bought $1.2885, are the strongest they've been in a year against the dollar. Measured against a Federal Reserve index of 19 major currencies, the dollar had slipped to 81.28 Friday from 85.17 in March.
One reason the dollar is feeling pressure is a growing sense in markets that the Federal Reserve may soon pause in its campaign to raise interest rates, while central banks in Europe and Japan may be lifting their rates in the near future. Economists say that higher interest rates tend to strengthen a country's currency because they draw in more investment.
Mr. Snow and his team are naturally suspicious of the idea that governments can or should meddle with exchange rates except in extreme cases.
Still, the protectionist sentiment sweeping Congress has forced the secretary to be more overt in his efforts to persuade China to allow the yuan to rise in relation to the dollar. The U.S. posted a $15.6 billion deficit with China in March, up from $12.9 billion a year earlier and by far the country's single largest bilateral trade gap.
U.S. exports to China rose during the period, to $4.96 billion from $3.31 billion, amid increased shipments of U.S.-made semiconductors and aircraft. But the increase was overwhelmed by a $5.29 billion surge in imports from China, to $47.321 billion, led by computers, computer parts and cellphones.
Chinese officials have vowed to take steps to help correct the imbalance. Early last month, Chinese officials went on a buying spree in the U.S., signing long-term deals to coincide with President Hu Jintao's visit to Washington. They've also promised to take steps to increase domestic demand in China for U.S.-made goods. But it may take months, in some cases years, for those pledges to translate into actual trade.
Exchange rates have been the main focus of bilateral tension. This past week, Mr. Snow said he was "extremely dissatisfied" that China, which has taken some steps to make its rigid exchange rate more flexible, hasn't gone further.
Mr. Snow argues such a move would benefit China's red-hot economy by helping it avoid a sudden crash. He also predicts that it would ripple through the other nations of East Asia that are keeping their currencies weak against the dollar and exporting heavily to the U.S. Implicit in his statement is a desire for a broad depreciation of the U.S. dollar against the currencies of the major economies of East Asia.
Even so, Treasury officials couch their desire in such terms as "adjusting" or "flexibility." They don't talk about a falling dollar.
Limited Ability
The U.S. has limited ability to sway currency prices, whether through action or inaction. Last month, Mr. Snow orchestrated a joint statement of the Group of Seven major industrialized nations calling for "greater exchange-rate flexibility" in China and elsewhere in Asia.
Not long afterward, Japanese Finance Minister Sadakazu Tanigaki, who had signed off on the statement, appeared to back away by talking down the yen and -- by implication touting the dollar. "The G7 statement does not call for a depreciation of the dollar," he said at this month's meeting of the Asian Development Bank in India. "I'm worried that the market has misunderstood the G7."
Mr. Snow's top international hand, Undersecretary for International Affairs Tim Adams, immediately fired back. "We should allow markets to set the values of exchange rates, and probably we should all refrain from not only intervening but commenting on exchange rates," he said at the same meeting
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