/www.bloomberg.com/ By Brendan Murray
Washington, March 6 (Bloomberg) -- As the U.S. moves closer to war, budget deficits swell and stocks swoon, currency traders have been waiting for another reason to sell the dollar. Treasury Secretary John Snow gave it to them.
On his 30th day as Treasury chief, Snow told reporters late Tuesday that he wasn't ``particularly concerned'' about a 21 percent drop in the dollar against the euro in the past year and an 11 percent decline against the yen. The remarks triggered selling in Tokyo, London and New York yesterday, pushing the dollar to the lowest against the euro since March 1999.
The market's response says more about the jitters of currency traders than it does about the U.S. policy favoring a strong currency, which Treasury has maintained with rhetoric since 1995. As Snow's first foray into foreign-exchange markets, his comment didn't reflect a change in policy because no actual policy exists, currency traders and economists said.
``There is no strong dollar policy -- it's really more of a worded mantra,'' said Michael Rosenberg, head of currency research at Deutsche Bank AG, the third-biggest currency trader. ``They're married to it and can't get divorced.''
Risks
For Snow, saying, ``the dollar is going to rise and fall some,'' as he did Tuesday, without following it with the strong- dollar line risks slowing investment that the U.S. needs to finance its current-account deficit, economists said. The shortfall means the U.S. needs to attract almost $1.4 billion a day in foreign investment to fund the deficit and keep the value of the dollar stable.
While Snow and the past four Treasury secretaries have stated their preference for the value of the dollar, ``strong'' has never been defined.
The U.S. hasn't taken steps to back up its strong-dollar talk since August 1995, when it sold $300 million in yen and $400 million in deutsche marks, according to Treasury. Since then, only two U.S. interventions in foreign-exchange markets have occurred, and both had the opposite intent of strengthening the dollar: in June 1998 to buy yen and in September 2000 to buy euros.
``The policy, which can best be described as `walk loudly and leave the stick at home,' consists of affirming a love for a strong currency while refraining from intervention and ignoring the intervention of other nations,'' said Christopher Low, chief economist at FTN Financial in New York. ``All this would be comical if it were not taken so seriously by currency traders.''
Not Enough Money
Some economists said the U.S. doesn't have enough money in Treasury's Exchange Stabilization Fund to make a lasting change in the dollar's value. The fund, used often in the early 1990s to steer the market, currently contains about $38 billion in yen, dollars and euros. That's a small amount when put up against the $1.2 trillion that typically changes hands daily in the global currency markets, according to the Bank for International Settlements.
The roots of the modern U.S. currency stance can be traced to Ronald Reagan, who was elected president in 1980 on a platform of a ``strong NATO,'' ``strong leadership,'' ``a strong peace,'' and a strong currency. His campaign advisers at the time included Nobel prize-winning economist Milton Friedman, former Treasury Secretary George Shultz and former Federal Reserve Chairman Arthur Burns.
``A sound monetary policy will be restored -- one designed to instill confidence in the American dollar abroad, as well as bring down the rate of inflation at home,'' according to a 1980 brochure from Reagan's campaign.
Bentsen to Rubin
The U.S.'s stated preference for a strong dollar was brought back under Lloyd Bentsen, Bill Clinton's Treasury secretary, in 1994 and refined by his successor, Robert Rubin. A former trader with Goldman, Sachs & Co., Rubin as well as his successor, Lawrence Summers, formulated with robotic precision the statement that a strong dollar is in the U.S. national interest.
While Rubin's repetition of the strong-dollar phrase helped keep the currency rising and reminded traders of his preference, Snow's comments this week weren't unlike Rubin's beliefs, economists said.
``Exchange rates over time are going to reflect fundamentals, Senator, and I believe the fundamentals in this country are very strong,'' Rubin said at his January 1995 confirmation hearing. ``And as a consequence, I think we will have a strong dollar over time, but as a reflection of the fundamentals.''
During the 1990s, a rising dollar helped to support the stock market, keep interest rates low and foster confidence around the world in U.S. investments, analysts said. Formally adopting a weaker stance on the dollar might have caused problems for Japan, which has counted on a weaker yen to boost its recession-plagued economy.
Inexact Science
The problem with attempting to shape the course of a currency, experts say, is that it is an inexact science. In the most famous case, the dollar fell 12 percent against the yen in the year after the 1985 Plaza Accord sought to weaken the dollar. The dollar kept falling, losing so much strength that global finance officials had to cobble together another agreement, the Louvre Accord in 1987, to buy dollars and boost the currency.
Similarly, in late 1993, then-Treasury Secretary Lloyd Bentsen suggested publicly that a stronger Japanese yen would be a good thing. The dollar proceeded to slide 29 percent to a postwar low of 79.75 yen by April 1995, and it was only lifted by a coordinated international effort.
Snow lasted longer than O'Neill before becoming ensnared in the currency market.
It took O'Neill 27 days into his tenure as Treasury secretary to disrupt foreign exchange trading with his words. He tried to explain that with a floating currency regime and a loathing of intervention, calling the U.S. view on currencies an actual policy was a stretch.
No Intervention
In a February 2001 interview with the German newspaper Frankfurter Allgemeine Zeitung, O'Neill was quoted as saying, ``we don't follow, as is often said, a policy of a strong dollar.'' The remarks -- which first sent the dollar falling, only to rebound after a Treasury clarification -- came a day ahead of O'Neill's first meeting with finance ministers from the Group of Seven industrial countries, in Palermo, Italy.
After his G-7 debut, O'Neill not-so-jokingly told reporters that if he planned to change his mind about the dollar, he would rent out Yankee Stadium in New York and hire a brass band to play at the press conference.
``I don't know how long it's going to take for foreign exchange traders to stop thinking that Treasury will intervene,'' said Frank Vargo, vice president for international economic affairs at the National Association of Manufacturers. ``I am convinced they won't.''