By Edmund L. Andrews
New York TimesSeptember 24, 2003
Rarely have so many people in so many countries been pushing for the dollar to get weaker rather than stronger. But today, three days after the Group of 7 nudged China and Japan to adopt more "flexible exchange rates," it remained unclear whether those two players would join in the game to weaken the dollar.
The Bush administration, eager for anything that could help reduce unemployment before next year's elections, has all but abandoned the strong-dollar policy of the Clinton administration and pressured Asian countries to let their currencies appreciate against the greenback.
European leaders are almost equally anxious. Over the last two years, the euro has soared against the dollar as well as Asian currencies. After an initial blush of pleasure at the euro's new credibility, European leaders are suddenly worried about having the only strong currency in the world. Indeed, European finance officials were at least as forceful as Treasury Secretary John W. Snow in prodding Asian countries at the Group of 7 meeting over the weekend in Dubai. "It's a fundamental change," said C. Fred Bergsten, director of the Institute for International Economics, a research group in Washington, who has argued in favor of a weaker dollar for several years. "This is the G-7 with the U.S. in the lead, quite clearly in favor of a weaker dollar."
Economists say there are many good reasons why the dollar should decline in value against other major currencies. Thanks in part to the strength of the dollar, which makes imports cheaper than otherwise for American consumers, the United States has a huge trade deficit and is by far the heaviest borrower in the world. A weaker dollar would make imports more expensive and provide a lift to American exports. Over time, it would help reduce the imbalance between the United States and the rest of the world. For American and European leaders alike, the question is simply how far and how fast the dollar should decline against other major currencies.
But the key to the dollar's prospects lies less in what the United States does than in the decisions by central bankers in Japan, China and to a lesser extent those in South Korea and Taiwan. Asia's big central banks have accumulated more than $1 trillion in United States Treasury notes and dollars over the last several years, and most of that growth is the result of attempts by Asian central banks to keep their currencies weak in relation to the dollar. The Bank of Japan has nearly $500 billion in Treasury securities and has been buying at a ferocious pace over the last year. China's central bank has about $350 billion. South Korea and Taiwan have amassed an additional $230 billion combined.
If China and Japan actually allowed their currencies to float freely, many analysts say the dollar would sink far more quickly than American officials actually want. Chinese leaders have made it clear they are not ready to change their policy, which is to peg the Chinese yuan at a fixed exchange rate to the dollar. And after an initial frenzy about a shift in Japanese policy, currency traders once again began predicting that the Bank of Japan would return to its old ways and intervene in the currency markets to weaken the yen. After allowing the yen to rise to its highest level against the dollar in three years on Monday, Toshihiko Fukui, the governor of the Bank of Japan, dampened expectations about a shift in Japanese policy. Mr. Fukui said that currency markets had "overreacted" to statements made by the Group of 7 countries. Though Japan is part of the group, the official statement left room for its leaders to continue intervening in currency markets.
Lou Crandall, chief economist at Wrightson ICAP, a publisher of financial newsletters, noted that China did not even participate in the Group of 7 meeting and that Japan quickly played down expectations of a change in policy. "What we have is a somewhat wishful statement from the Group of 7, when six of the seven are already committed to flexible exchange rates," Mr. Crandall said. "Only one of the targeted nations had a seat at the table, and that nation politely dissented in statements after the meeting."
Many experts predict that Japanese leaders will be reluctant to let the dollar weaken substantially against the yen. After years of stagnation, the Japanese economy is finally beginning to show signs of stronger growth and exports have traditionally been the key to growth. Letting the Japanese yen rise in value would make Japanese exports more expensive in the United States. But even those who do not believe that Asian countries will change policy say the days of championing a strong dollar are over.
The shift may have begun under President Bush's first Treasury secretary, Paul H. O'Neill, who placed less emphasis on keeping the dollar strong than on letting market forces rule. The shift became much more pronounced under Mr. O'Neill's successor, Mr. Snow, who has tried to publicly press Chinese leaders into relaxing their policy. That shift reflected intense lobbying from American manufacturing companies, which have shed more than two million jobs over the last several years and have blamed much of their plight on efforts by China to deliberately undervalue its currency. "The big story here is that John Snow finally listened to the key points we were making," said Jerry Jasinowski, president of the National Association of Manufacturers.
Tables and Charts on the Fall of the Dollar
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