Sliding dollar helps exports, works in president's favor

December 07, 2003|By JAY HANCOCK

THE DOLLAR dived again last week, plunging vs. the yen and euro and cratering even against the Mauritian rupee and Polish zloty.

Currencies rise and currencies fall, but the dollar dip has become big, changing the bottom line for industry and politicians alike and, if it holds, all but assuring George W. Bush's re-election.

How big? Bush's removal of anti-import shields for big steel last week provoked barely a bleat from industry bosses. Two years of change in the euro-dollar relationship have made European steel roughly 40 percent more expensive for American buyers and American steel roughly 30 percent cheaper for European buyers.

That'll assuage a ton of whatever problems you thought the U.S. steel business might have had: imports, pension burdens, dated plants, high wages.

Europe is so paranoid about events it's talking about Third World-style capital controls to ground the euro.

It certainly shouldn't count on any action from the Bush administration, whose equivocal public statements can't hide a secret, bashful love for a swooning greenback. Currency policy always involves cognitive dissonance, but Treasury Secretary John W. Snow has stopped merely speaking from both sides of his mouth and apparently hired a stunt double.

"We have a strong-dollar policy," Snow told reporters outside the White House on Thursday. But he was contradicted on the spot by a bald, well-dressed man bearing a striking resemblance to the Treasury secretary, who said, "I think the dollar - as other currencies' value - is best set in open, competitive currency markets," which really means, "We don't have a strong-dollar policy."

Indeed they don't. There is actually little Treasury can do to control the dollar's long-term value one way or the other. But the political preference at the moment is for a feeble buck - or at least feebler than it was - which happens to align with economic reality.

And as long as Washington signals it won't intervene and burn currency traders who bet against the dollar, they'll continue to return the favor and work - unconsciously, perhaps - for Bush's re-election.

He needs the help. His approval ratings have slipped. The economy is his trump card, and the other economic levers at his disposal are hitting the red zone.

He can't cut taxes anymore, having presided over record budget deficits. He can't get the Federal Reserve to lower short-term interest rates again; they're already near zero. A weaker dollar is the third button, and it was due for a dip.

The dollar soared in the 1990s as global investors poured money into U.S. real estate, factories, stocks and bonds. It held up surprisingly well when stocks plummeted from 2000 to 2002, but this year it has tumbled as low interest rates and big deficits took their toll.

Low rates are a disincentive for income-seeking bondholders to hold dollars, and big budget and trade deficits tend to lower dollar demand, too.

To be sure, the dollar has not fallen equally - or at all - against every currency. China's money, the renminbi, is fastened to the dollar like a remora on a shark. Chinese imports are as cheap as they've ever been. The dollar is down about 20 percent against the Japanese yen and Canadian dollar from their highs last year, but it has gained on the Mexican peso.

Not every foreign currency is important, either. The financial stampede into Poland and Mauritius last week bodes well for owners of emerging-market bonds but hardly anybody else in this country.

Against an index tied to major U.S. trading partners, the buck has declined only 10 percent from its 2002 high - not even close to giving up the 30 percent gains it made in the 1990s.

Of course, any dollar drop is not pure benefit for Americans. A weaker dollar might spook investors into dumping U.S. stocks and bonds, and makes imports more expensive.

But a 10 percent trade-weighted decline in the dollar is a huge move - the biggest since the 1980s. For the steel industry and other exporters showing signs of hiring again or at least stemming layoffs, it's better than protective tariffs.

And that will influence next year's vote much more than whether the price of Bordeaux goes up.

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