Feb. 2 (Bloomberg) -- U.S. Treasury Secretary John Snow says he wants a ``strong'' dollar and the record $520 billion federal budget deficit ``to come down.'' Election-year politics won't help him achieve either. Snow's priority is stoking the domestic economy to help deliver a second term to President George W. Bush in November, even as European economic chiefs Jean-Claude Trichet, Hans Eichel and Francis Mer suggest the dollar's 14 percent decline against the euro in the past year has hindered their region's growth.
The dollar's drop has helped U.S. companies such as Nike Inc., the No. 1 athletic shoemaker, whose fiscal second-quarter profit rose 18 percent as European sales gained 9 percent. The U.S. economy grew 4 percent last quarter, slower than the median forecast yet faster than predictions for the euro-zone economy. The Bush administration today unveils a budget proposal that increases defense spending 7.1 percent and widens the deficit. ``There is zero chance that the secretary will respond to European complaints about the budget deficit or the dollar,'' said Robert Solow, who won the Nobel Prize for economics in 1987 and is a professor emeritus at Massachusetts Institute of Technology, in an interview. ``The recovery still has some way to go, and he won't want to endanger it.'' Snow may have to defend his stance as he meets with finance ministers and central bankers from the Group of Seven industrial nations this week in Boca Raton, Florida. He said in the text of a Jan. 26 speech that global growth will top the G-7 agenda and that he wants ``all the major economies striving to be dynamic, productive economies.''
`Brutal' Exchange
Eichel, Germany's finance minister, and France's Mer say they want Snow to help counter the dollar's decline, which they say hurts their economies, and cut the budget deficit before it sparks a rise in interest rates. European Central Bank President Trichet last month told reporters in Switzerland that the euro's rise to a record against the dollar had been ``brutal.'' Eichel said Jan. 20 the ``sustainability of the recovery in the euro area is not yet assured.'' ``I hope that the responsibility for Europe, for the U.S., for Japan and some other countries will be strong enough to take care of a subject which might become dangerous,'' France's Mer said of the euro in a televised interview with Bloomberg News. The dollar's decline punished European producers such as Paris-based L'Oreal SA and Adidas-Salomon AG of Germany by forcing their prices in dollars to rise. L'Oreal, the world's largest cosmetic maker, said Jan. 21 that fourth-quarter revenue was little changed, tempered by the euro's appreciation against the dollar. A full revenue statement will be issued Feb. 20.
Deficits
German Deputy Finance Minister Caio Koch-Weser in a televised interview Jan. 21 in Davos, Switzerland, joined the International Monetary Fund in saying that U.S. budget and trade deficits may pose ``significant'' problems because an increase in borrowing costs may slow the world economy. As the White House updates its budget forecast today, Merrill Lynch & Co. predicts the shortfall will reach a record $550 billion in the current fiscal year. The U.S. trade and current account gaps exceeded a record $500 billion in 2003. Snow, who marks his first anniversary at the Treasury tomorrow, has found success in using his perch as an international diplomat to satisfy political constituencies at home. He was appointed to replace Paul O'Neill, who disagreed with Bush's tax-cutting agenda, and spent most of his first few months in office lobbying Congress and executives to support the package. The tax cuts were signed into law May 28. In his first four G-7 meetings, Snow portrayed U.S. tax cuts as evidence of efforts to spur growth, and, amid complaints from U.S. lawmakers and manufacturers, he persuaded the group to urge more flexible currencies in countries such as China.
U.S. `Doing Its Part'
Snow said Jan. 26 he wants to hear what each of the other countries is doing to speed up world growth; he'll be able to point to an average 6.1 percent annual growth rate in the second half of 2003 as evidence that Bush's actions have worked. The G- 7, which accounts for two-thirds of the global economy, is composed of the U.S., Japan, Germany, the U.K., France, Italy and Canada. ``We've got a global output gap that needs to be filled and America is doing its part,'' said Paul McCulley, a managing director at Pacific Investment Management Co., the world's biggest bond fund, managing $350 billion from Newport Beach, California, in an interview. ``Rather than complain, the rest of the world should do its part to create domestic demand.''
`Make Things Look Good'
The Bush administration won't offer short-term solutions as it tries to fuel the recovery and win votes, said investors such as billionaire financier George Soros. ``Everything has been geared up to make things look good, and be good, prior to the elections,'' Soros said in an interview last week at the World Economic Forum in Davos. The Federal Reserve voted Wednesday to hold its benchmark overnight interest rate at 1 percent, half the European Central Bank rate. U.S. central bankers dropped their commitment to hold down rates for a ``considerable period'' and said they could ``be patient'' before elevating them. Last week, the dollar rose 0.8 percent to $1.2478 per euro, its second weekly gain in three. A reinvigorated economy fueled by the lowest Fed interest rates since 1958, the effects of the dollar's decline and deficit spending should elevate Bush's electoral chances in November, said Rick Lazio, president of the Financial Services Forum, which represents 21 of the largest financial services companies.
Re-Election Chances
``The economy is going to be extraordinarily important for the president,'' said Lazio, a former Republican representative from New York. ``It will be a decisive issue'' in November's elections. Bush is statistically tied in a contest against Senator John Kerry of Massachusetts, who won the Democratic Party's Iowa caucus and New Hampshire primary, according to a poll released Thursday by American Research Group Inc. Those who approve of the way the Republican president is handling the economy fell to 42 percent of those polled from 52 percent in December in a separate American Research survey of 1,100 adults taken Jan. 27-29. The dollar's drop is aiding American companies that export and have operations abroad, such as Nike, when they sell more goods internationally and repatriate foreign profits, in turn helping expand jobs, profits and the economy. Even as Snow endorses a ``strong dollar,'' he also says he wants markets to set its value -- not governments. The U.S. hasn't bought its currency since 1995. Snow underscored the point when the G-7 decided last September in Dubai to echo his call for currency ``flexibility'' -- a statement aimed at Asian governments such as China and Japan, which manipulate their exchange rates. That position, together with Snow's December observation that the dollar's depreciation has been ``orderly,'' has fueled investor belief that Bush welcomes the drop in the dollar as a means of boosting the economy and helping his re-election. ``There's nothing from the Treasury's point of view that says this weaker dollar is becoming a problem,'' said Robert Sinche, head of global currency strategy at Citigroup Inc., the second-largest trader in the $1.2 trillion-a-day currency market.
An `Orderly' Decline
Snow can afford to stand by while the dollar falls because the drop hasn't triggered panic selling in other financial markets. Foreign governments and investors bought a net $87.6 billion of U.S. assets in November, compared with $27.8 billion in October and $4.2 billion in September. Holdings of Treasuries alone rose $33 billion. Last week the Dow Jones Industrial Average fell 80.2 points, or 0.8 percent, to 10,488.07. The U.S. is already reaping rewards. Shipments abroad have climbed almost 23 percent in two years. Nike attributed half its 13 percent increase in sales during the quarter ended Nov. 30 to the dollar's fall. Excluding the exchange rate's impact, sales would have dropped 6 percent in Europe. ``We're definitely seeing some benefits from the weakness of the dollar'' said Charlie Denson, president of branding at the shoemaker, in an interview in Davos. ``I don't think it would be wise to take any rash decisions'' at the G-7.
Benefits for Nike
European leaders say they worry the euro's climb is crimping an export-led recovery from the weakest economic growth in a decade. Herzogenaurach, Germany-based Adidas, the world's No. 2 sporting-goods maker, said last week that quarterly revenue dropped 9.9 percent as the dollar tumbled. ``Risks to this year's economic outlook stem primarily from the development of the euro's exchange rate,'' German Economy Minister Wolfgang Clement told reporters last week in Berlin. Exports account for 30 percent of German GDP. Meanwhile, the Japanese are trying to prevent the dollar's fall against the yen. The Bank of Japan sold a record 20.1 trillion yen ($190 billion) last year, five times as much as in 2002, to cushion the impact on exporters such as electronics makers Sharp Corp. and Canon Inc., in turn forcing more of the burden of the dollar's drop onto the euro. European officials may want the G-7 to signal concern at the Florida talks about volatile currency markets in the hope that doing so will allow the euro to ease in value, said Thomas Gallagher, managing director of International Strategy and Investment Group Inc. in Washington.
Urging Flexibility
Richard Clarida, who until last May served as the U.S. Treasury's chief economist, said he expects Snow to oppose action to reverse the dollar's fall and try to maintain the G-7's stance on currency flexibility from the Dubai meeting. ``The U.S. will endeavor to stick as closely as it can to the Dubai language, and that's the way it should be,'' said Clarida, who is now chief economic strategist at the New York- based Clinton Group Inc., which manages $10.3 billion. Snow signaled that the status quo and a hands-off approach are his preferences in a Jan. 23 radio interview with Bloomberg News. ``We believe in flexibility,'' he said. ``By having flexibility, you avoid imbalances and you create orderly markets.'' That may lead the dollar to fall after the weekend, economists said. ``The market is over-estimating the likelihood that we will see an effective G-7 statement,'' said Steven Englander, chief currency strategist at Barclays Capital Inc. Snow and his foreign counterparts will find more common ground on the U.S. budget deficit, yet there is little the Treasury secretary can promise. He has called the imbalance ``unwelcome'' and has pledged to halve it during the next five years.
Deficits Continue
As Bush asks Congress to limit the increase in non-security spending to less than 1 percent this year, he is also pressing to extend tax cuts and boost defense outlays just as lawmakers will be trying to ensure their own re-election with more spending. Permanent tax cuts alone would stretch deficits through the next decade, the Congressional Budget Office said last week. Bush has never vetoed a spending bill. ``The likelihood the president and Congress will approve a declining deficit in an election year is frankly zero,'' said William Niskanen, the former chairman of the Council of Economic Advisers under President Ronald Reagan, who is now chairman of the Cato Institute, a libertarian research group in Washington, in an interview last Monday. That won't stop European criticism, which -- based on recent comments -- may echo statements over the past month by the IMF, Fed Governor Donald Kohn and former Treasury Secretary Robert Rubin that U.S. deficits may eventually hamper growth. ``The medium-term consolidation in the public finances in America needs to be addressed,'' Germany's Koch-Weser said in a January interview.
U.S. Response
John Taylor, Snow's undersecretary for international affairs, rejected such criticism last week, telling reporters the budget deficit as a share of GDP is ``actually less than it has been in years subsequent to previous recessions.'' Snow will have his own chance to respond, especially if critics bemoan a trade deficit he attributes to weak growth abroad. He wants the rest of the G-7 to follow the U.S. example by pursuing domestic-led expansions rather than relying on the world's largest economy to serve as the economic engine for the rest of the globe. Such reasoning lay behind the Dubai memorandum setting individual policy goals for each country, ranging from tort reform in the U.S. to improving labor market flexibility in France and Germany.
With the Organization for Economic Cooperation and Development predicting U.S. GDP growth this year will outpace that of each other G-7 member by a full percentage point, Snow plans to urge others to stop parsing U.S. actions and instead apply policies that will speed up their own economies. ``As you do better, we do better, and as we do better, you do better,'' Snow told London executives last week. //www.bloomberg.com