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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