Since the G-7 summit in Dubai on the weekend of September 20, the press has run “weak dollar” stories of various kinds, from the mundane to the abstruse. The reports range from clucking over a Bush administration policy of “talking down” the dollar to brow-furrowing concern over the size of the U.S. account deficit — the amount by which our imports (in dollars) exceed our exports. President Bush is in Asia this week, and the dollar will feature, as will terrorism. Here are two typical recent reports. You’re going to hear a lot more like them.
From channelnewsasia.com on the weekend of the Dubai summit:
“The US dollar was weaker broadly and fell to a 2-1/2-year low against the yen in New York on Friday on speculation the G7 may object this weekend to Japan’s yen-weakening intervention policies…In late New York trading, the dollar was trading at 114.22 yen, down nearly 1 percent on the day.”
Two weeks later, on October 7, the Financial Times weighed in:
“The dollar faced renewed downward pressure on Tuesday, falling to fresh three-year lows against the yen and within sight of record lows against the euro, amid mounting concern over the scale of the US current account deficit…The dollar dropped below Y110 for the first time in three years, prompting market reports that a subsequent rally was the result of further intervention by the Bank of Japan.”
Currency could serve as a year’s subject matter for a graduate seminar in economics, and I can’t handle it with any justice here. But, oversimplified, here goes: A country with a weak currency can export more, especially to a country with a strong currency. Think Japan, which in its heyday as a growth economy fielded the yen at 300 to the dollar. The United States is (a) an importing country, and (b) the dollar is the currency of record in the world. Jobs have mostly migrated abroad. President Bush wants to “reflate the economy” and “create jobs.” All domestic means — tax cuts, interest rate cuts — have been exhausted. Ergo, weak dollar gets the job done.
Our Asian trading partners, notably Japan and China, don’t take kindly to that. They’ve been pursuing weak currency policies to pump up their own economies. Publicly, the President will talk about a “strong dollar” (sounds good to the hoi polloi). Behind closed doors, he’ll be saying something very different, and the markets will try to surmise what.
In the worst case, what concerns the money pros reads like a Tom Clancy scenario, one Clancy has actually employed in his tour-de-force Jack Ryan novel, Executive Orders. Suppose China — or any other big foreign holder of U.S. Treasuries — sold a large quantity of Treasuries and put the money in Euro bonds instead. The EU was formed in large part to field another competitive big-bloc currency to counter the dollar. The selling pressure would drive down dollar values so far that the current fuss over a few yen or yuan one way or another would be forgotten in the rush for the exits.
Well, maybe. One hundred ninety billion dollars — the size of our deficit with China — isn’t all that much money, really, in the great wash of world currency markets. Who needs what worse? Do we need $190 billion worth of mostly marginal consumer goods? (In another novel, The Bear and the Dragon, Clancy imagines the people of the United States driving China to the brink of bankruptcy by boycotting Chinese-made products.) Or does China need the $190 billion from us, with which to buy oil and other dollar-denominated necessities?
It’s the economic version of Mutually Assured Destruction (MAD).
For now, for today, the first big fear about the marginally weaker dollar — that fewer parties would want to buy U.S. Treasuries and other assets — has proved spectacularly unfounded. The first two Treasury auctions after the G-7 were well sold out, with record “nominee” — read “foreign” — participation. A weaker dollar makes T-notes that much cheaper.
You’d think traders would have known that on September 22. They didn’t; markets were in a panic that day. Then by Wednesday, the day of the Treasury auction, they had gone into full Emily Litella mode. Never mind.
President Bush has headed to Asia with the dollar and terrorism on his mind and on his agenda. It would be most interesting to know what gets said in secret meetings between the President and his Eastern counterparts. It will not resemble what is said in public at all. To figure that out, you’ll have to read blips on a computer screen. Millions of currency traders will be doing that, 24/7.