Bush vows to rein in budget deficit

European leaders worry about decline of dollar

December 16, 2004|By Joel Havemann and Warren Vieth | Joel Havemann and Warren Vieth,LOS ANGELES TIMES

WASHINGTON - President Bush, facing complaints from a European ally about the weakening dollar, said yesterday that he favored a strong dollar and would work with Congress to cut the huge federal budget deficits that put downward pressure on the U.S. currency.

But just before Bush spoke, Vice President Dick Cheney, reiterated to a White House economic conference that the administration favored more tax cuts, which some analysts said could deepen the budget deficit and threaten the dollar's value.

The White House conference, which continues today, also is intended to pave the way for Bush to promote changes to Social Security that the White House has said would probably require more federal borrowing.

Despite Bush's statement of support for a strong dollar, the U.S. currency weakened further on international markets, losing more than 1 percent of its value against the Japanese yen and nearly 1 percent against the euro.

The dollar's continuing slide pointed up the difficulty Bush faces as he tries to assemble a set of economic policies that work in concert with his political goals. Trading partners have complained about the weak dollar, which makes U.S. goods cheaper on international markets, and Bush said yesterday that he wanted to cut spending and reduce the deficit to create an environment that would strengthen the dollar.

But at the same time, the president's top priorities include extending tax cuts, revamping Social Security and spending money for the Iraq war, all of which could add to the deficit and possibly weaken the dollar.

From Europe's viewpoint, the euro's ascent compared to the dollar has damaged sales of its goods in the United States. This is why Italian Prime Minister Silvio Berlusconi, on a visit yesterday to the White House, complained to Bush about the weak dollar, which has declined about 35 percent against the euro since February 2002. The euro is the currency of Italy and 10 other European nations.

"The policy of my government is a strong-dollar policy," Bush said after meeting with Berlusconi.

Analysts said Bush had little choice but to stand behind the dollar.

"Comments about a strong dollar are kind of like saying, `I'm all for education, motherhood and apple pie,'" said James Paulsen, chief investment officer for Wells Capital Management in Minneapolis. "It's pretty much meaningless. The president can't get up in front of the nation and say, `I'm for a weak dollar.'"

Some analysts said that Bush in fact might prefer a weak dollar, because it helps U.S. companies sell goods abroad. But analysts said that if Bush declared his support for a weaker dollar, investors might form a stampede to sell dollars, draining U.S. markets of needed capital and driving interest rates up.

The nation's huge trade and budget deficits are sending a flood of dollars overseas, as Americans pay with U.S. currency to buy foreign goods and the government issues dollar-denominated debt to pay its bills, in essence increasing the supply of dollars.

One effect of the increasing hoard of dollars worldwide is to cheapen the currency's value, as with anything in great supply, some experts say.

The Los Angeles Times is a Tribune Publishing newspaper.

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