---- by Christopher Anstey ----
WASHINGTON (AFX) - The Bush administration is expected to withstand recent pressure from U.S. manufacturers to alter its commitment to a strong dollar policy given the potential costs to the current account of a strategic change of direction, analysts said.
"It's just noise ... I don't think the Bush administration is going to capitulate to them," said Marc Chandler, chief currency strategist at HSBC in New York.
The costs to the U.S. economy of reversing, or even qualifying, the strong-dollar policy would outweigh any benefit to exporters, although the authorities may show some flexibility in managing the currency depending on how the economy performs over the second half, economists said.
While questions were raised when President George W. Bush took office about the new cabinet's commitment to maintaining the strong-dollar policy, doubts have largely been put to rest, analysts said.
The corporate backgrounds of Treasury Secretary Paul O'Neill, former Chief Executive Officer of Alcoa Inc, oil-industry veterans Vice President Dick Cheney and Commerce Secretary Don Evans, and Chief of Staff Andrew Card, former head of the American Automobile Manufacturers' Association, helped raise those initial questions. Card, in particular, had been prominent in the mid-1990s in calling for a weaker dollar/yen to help boost U.S. motor companies' efforts to penetrate Japan's market.
However, the latest calls by manufacturers for a qualification of the strong dollar policy have had no impact on the public statements of Bush officials.
"They've done a good job of putting those doubts to rest," said Alex Beuzelin, senior market analyst at independent advisory group Ruesch International in Washington.
Asked for O'Neill's reaction to industry pressure, and whether he is concerned about the competitiveness of U.S. firms as a result of the dollar's strength, Treasury spokeswoman Michele Davis told AFX News: "The Secretary has e very confidence in the ability of American business to succeed. He sees no reason to change our dollar policy." In recent weeks, O'Neill has met with Jerry Jasinowski, President of the National Association of Manufacturers (NAM), and John Dillon, head of the CEO-group Business Roundtable. O'Neill's commitment to a strong dollar was reportedly an issue at both meetings.
Despite such pressure, Chandler of HSBC said that "they (the Bush administration) are steadfast" in sticking with the strong dollar policy.
Earlier this month, Jasinowski and the heads of five other manufacturing sector groups released a letter calling for a clarification of that policy.
"A clarification of Treasury policy is in order, to be certain that it is not seen as endorsing an ever stronger dollar irrespective of the economic fundamentals," said the letter, addressed to O'Neill. Analysts said that U.S. dependence on foreign capital inflows to finance large current account deficits makes any change in the strong dollar policy too costly to implement.
"Qualifying it could unsettle market confidence in U.S. assets," Beuzelin said.
Even a statement such as proposed by Jasinowski, saying the U.S. does not support an "ever stronger dollar," could "renew questions about the commitment of O'Neill to a strong dollar" and spark dollar selling, Beuzelin said.
Michael Rosenberg, head of foreign exchange research at Deutsche Bank Securities, said that "if the U.S. engaged in talking the dollar down, it would result in huge capital outflows."
Analysts noted that White House economic director Lawrence Lindsey recognised this point in the article on dollar policy he wrote in The International Economy in April.
"Global willingness to hold dollars and dollar-denominated assets is fundamentally what is meant by a strong dollar policy," Lindsey wrote, adding that "the benefits of a strong currency for our country outweigh the costs."
It is not surprising that the manufacturing sector is publicly calling attention to those costs at a time of weakening overseas demand and slowing U.S. economic growth, analysts said. To some extent their calls may be a means of underlining the dollar's impact on corporate profits, they added.
"They need to explain ... why they have disappointing earnings," Chandler at HSBC said, adding: "This is a means of underlining the point."
Rosenberg said that "it's the kind of classic (reaction) you typically find in an environment where the dollar has strengthened for a long period of time," noting that the dollar currently stands close to a 15-year high on a trade-weighted basis.
Analysts said the Bush administration is ultimately bound to maintain a strong-dollar policy in the face of the country's dependence on overseas capital.
"I think they're basically tied to it," Rosenberg said. Chandler agreed: "They're painted in a corner; a weaker dollar would hurt even more."
However, analysts added that the strong dollar policy still contains some flexibility and some argue that the Bush administration would be comfortable seeing the market take the dollar down somewhat if a U.S. economic recovery does not materialise in the second half. "It leaves room for flexibility," Chandler said, noting that while O'Neill predecessors Robert Rubin and Lawrence Summers consistently adhered to a strong dollar policy, they intervened twice to sell the U.S. currency.
The U.S. intervened to support the yen in June 1998 and to lift the euro last September, he noted, yet the U.S. Treasury "still said it was consistent with a strong dollar."
Marsel Kasumovich, international economist at Goldman Sachs, said the administration likely would be comfortable with a weaker dollar later this year if widespread expectations of an upturn in the U.S. economy do not materialise.
This would be reinforced if Europe's and Japan's economies continue to weaken, further drying up external demand for U.S. goods, he said. A third, little-noticed factor is some concern at the Federal Reserve that the strong dollar is inhibiting the easing effect of the central bank's five interest rate cuts this year, Kasumovich said.
The minutes for the March 20 Federal Open Market Committee meeting said a number of FOMC members noted the strength of the dollar was a diminishing factor in the monetary easing to date. Minutes for the May 15 FOMC meeting will be released on Thursday.
If the stimulus from monetary easing and tax cut rebates does not appear to boost the economy in the next few months, Kasumovich said: "I don't think they (the Bush administration) would stand in the way of a (weaker) dollar.
"They definitely would let market forces prevail ... if fundamental forces were to dictate a weaker dollar (in such a scenario)," he said.