17 January 2001, 11:04 BRIDGE ANALYSIS: A look at those rumors on the dlr and O'Neill -
London--1235 GMT--Jan. 16 Tel: +44-20-7842-4185
We note one or two rumors emanating from Asia concerning US Treasury
Secretary designate Paul O'Neill and US dollar policy. Market rumors
center on his Senate Finance Committee hearing on Jan 17 (Wed) at which
O'Neill is rumored to voice reservations about the US's strong dollar
policy due to its effects in reducing exporter competitiveness. As far as
we can establish, there is no substance in these rumors and that they are
purely speculation building up ahead of his confirmation hearing, which is
expected to be approved on Jan 20, the day President-elect Bush takes
office.
Today's New York Times carries a focus piece on O'Neill, which gives
some interesting background to the man and his time at Alcoa and may be
one of the sources of the above mentioned market speculation. Markets
should note that O'Neill declined to be interviewed for the article and
hence its findings offer no direct quotes. Aside from the fact that from
now markets will increasingly focus on what O'Neill might have to say on
Wed, the Times' provides added interest in its summing up paragraph, which
says "as an exporter he would be favored to support a weaker dollar." But
the paper admits O'Neill "has made no statements on this question."
In the preceding paragraph the paper notes that in 1994, O'Neill
joined four other industrial chief executives at the White House to argue
that the economy could be allowed to grow at a faster pace through lower
rates without triggering inflation. The Times, says that this is a
position O'Neill repeated in his first news conference as Treasury
Secretary designate (Dec 20), and "one certain to please corporate
America." Against these two paragraphs then, it is perhaps no surprise
that there are some market rumors suggesting O'Neill will publicly give up
the strong dollar mantra, in exchange for support for Bush's lower tax
plan.
So far, markets do no seem to be taking these rumors seriously, with
the dollar continuing to holds its gains of the last couple of days versus
European currencies. There are good reasons for the market's scepticism.
Firstly, the article in the New York Times concentrates on O'Neill's time
at Alcoa, making much of his ability to turn around a company with
seemingly dim prospects into the world's biggest and richest aluminium
producer. It talks about his focus on productivity gains and a canny
ability to seek solutions around problems, generally painting a picture of
a man that managed creative alternatives to seeking protection from
Washington. While the paper does not mention it, it is also worth
remembering that O'Neill achieved these feats for Alcoa despite the US's
strong dollar policy.
Secondly, there is no telling what would happen to inflation if the
incoming Bush administration were to lower taxes (providing it could pass
such measures) as well as lowering the dollar. It is well known the dollar
has been a source of stability in countering inflationary effects for the
last few years. Moreover, to signal a shift toward a lower dollar at a
time when global confidence in the US economy is already on a cliff-edge
sounds rather dangerous to put it mildly. While the US would doubtless
like to have a lower current account deficit and be less reliant on
incoming foreign investment, signalling no reluctance to a lower dollar
could cause panic among foreign investors and lead to a wave of outward
investment. Given the Fed's unexpectedly timed Jan 3 rate cut--designed to
shore up confidence--an announcement of a lower dollar would seem a
bizarre move at this stage.
Thirdly, to use a confirmation hearing as a platform to announce a
shift of such magnitude, possibly plunging markets into far greater
turmoil, would hardly encourage confidence. While O'Neill has not made any
public comments on the USD to date, he did say on Dec 20 that he believes
the economy can operate at higher levels without inflation that it did 20
yrs ago. And given that he also said he believes in the economic proposals
of Bush and that Bush has "the right ideas about where the economy should
go," it seems clear he also favors the lower taxes and lower rates
route--another reason to keep the dollar strong.
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