- George Bush's foreign policy is simple: don't mess with
America. The same, it appears, applies to economic policy as well. On Friday,
the dollar fell sharply against the euro. That was unsurprising, since
the downward lurch followed comments from Alan Greenspan which - by his
own cryptic standards - were unambiguous.
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- "It seems persuasive that, given the size of the
US current account deficit, a diminished appetite for adding to dollar
balances must occur at some point," Greenspan said. This was hardly
a novel statement for the Federal Reserve chairman but the timing was interesting.
It came on the eve of a meeting of the G20 - a conclave of developed and
developing nations - in Berlin at which the recent fall in the dollar was
a hot topic.
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- Moreover, it came three days after John Snow, US treasury
secretary, poured cold water on the idea that the world's central banks
might get together to arrest the dollar's fall. The history of "efforts
to impose non-market valuations on currencies is at best unrewarding and
chequered", he said in London.
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- Alarmed
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- Europe got the message. Eurozone policymakers are growing
increasingly alarmed about the fall in the value of the dollar, since it
threatens to choke off exports - the one area of growth in the 12-nation
single currency zone. They would like nothing more than to wade into the
foreign exchanges in concert with the Fed and the central banks of Asia
to put a floor under the greenback, but they know that Washington has no
interest in such a move.
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- Joaquin Almunia, Europe's monetary affairs commissioner,
said last week: "The more the euro rises, the more voices will start
asking for intervention. It has to be a coordinated effort but it seems
that our friends across the Atlantic aren't interested."
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- That sums things up rather nicely. There are two reasons
why the Bush administration is not willing to play ball with the Europeans.
The first is that it sees a lower dollar as inevitable given that the US
current account deficit is running at $50bn-plus a month. A lower dollar
makes US exports cheaper and imports dearer.
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- According to this interpretation, the Americans are now
simply bowing to the inevitable. Stephen Lewis, of Monument Securities,
says the markets have finally lost patience with the laxity of Washington
towards the twin trade and budget deficits, pumped up by cheap money and
tax cuts. "The truth is that the US fiscal and monetary excesses,
which have been essential to keeping the global economy afloat in recent
years, are no longer tolerated in the foreign exchange markets," he
said. "The status quo is not an option. The only question is how the
pain of adjustment will be apportioned."
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- The second reason is that the Bush administration has
neither forgotten nor forgiven France and Germany for the stance they adopted
over Iraq. Jacques Chirac and Gerhard Schrder weren't interested in helping
the US to topple Saddam, and now it's payback time. If the European economies
are suffering as a result of the weak dollar, why should the US care? What's
happening in the currency markets is simply American unilateralism in a
different guise.
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- In the short term, therefore, the dollar looks like a
one-way bet. City analysts are already talking about it hitting $1.35 against
the euro, and given the tendency of financial markets to overshoot, nobody
would be that surprised if it fell to $1.40 over the coming months. A smooth
and steady decline - which is what Snow is trying to finesse - would do
little damage to the US economy, but it would hit Europe hard.
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- This might seem perverse, given all the fuss there was
when the euro was falling against the dollar immediately after its launch.
Then, however, the problem was one of credibility for a fledgling currency
because the impact of a weak euro was to boost demand for European goods.
With a strong euro, there will be a direct impact on European exporters.
Given that the latest figures show that Germany and France both grew by
only 0.1% in the third quarter, a sharp drop in exports could quite easily
push the eurozone's biggest economies back into recession.
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- Growth forecasts for the eurozone - already modest -
are likely to be scaled down over the next few months, and budget deficits
are likely to get bigger. A fresh downturn could prove the death knell
of the stability and growth pact, which would be no bad thing, and higher
unemployment would intensify resistance among workers to structural reform
of the eurozone economies.
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- Washington may have another reason - apart from getting
its own back - for allowing the Europeans to suffer. The US is desperate
for the Chinese to revalue the yuan, but has so far utterly failed to get
Beijing to agree to abandon its dollar peg. The Chinese, for political
as well as economic reasons, are determined to resist American pressure.
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- Europe - the French, in particular - have influence in
China. As one analyst noted last week, China has never been censured by
the United Nations security council - even over the massacre in Tiananmen
Square - because Paris has always vetoed any such moves. France, so the
theory goes, might have more success in persuading the Chinese to revalue
than the Americans have had.
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- It has to be acknowledged, however, that you would be
hard pressed to find a financial analyst who believes Snow is capable of
this level of sophistication. After his performance in London last week,
one said: "I would sell the currency of any country of which he was
the finance minister." The likelihood is that even if the Americans
were to use the Europeans as a proxy, the Chinese would still resist. Certainly,
all the evidence is that China's central bank is still intervening aggressively
to keep its currency stable. Without that action, the dollar's fall in
recent days would have been even more rapid.
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- Talking the dollar down is easy enough, but the strategy
depends on a smooth descent that boosts US growth without scaring off the
overseas investors who fund the twin deficits. Should it turn into a disorderly
rout then there would inevitably be a spillover into other markets and
into the real economy.
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- Washington, in other words, is relying on a soft landing
for the dollar. History shows, however, that there is a better than even
chance of this process ending in a full-scale crisis, as it did in the
mid 1980s, when the weakness of the dollar culminated in the stock market
crash of 1987. And that, of course, was at a time when the G7 was acting
in concert. As Lewis said, the crisis could be triggered by a seemingly
minor event, as when the Nigerians precipitated the run on the pound in
1976 by switching into dollars.
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- The US is happy to go it alone for now, since this is
the forex equivalent of the quick push to Baghdad. Life is likely to get
tougher later - and when it does, multilateralism will have its attractions.
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- Guardian Unlimited © Guardian Newspapers Limited
2004
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- http://www.guardian.co.uk/usa/story/0,12271,1356743,00.html
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