Wednesday, November 14, 2007

Bush’s Dollar?

From AFP:

US dollar will get stronger: Bush

US President George W. Bush predicted in an interview Tuesday that the battered US dollar will get stronger because the US economy is robust.

“If people would look at the strength of our economy, they’d realize why, you know, I believe that the dollar will be stronger,” Bush told the fledgling Fox Business Network.

“We have a strong dollar policy, and it’s important for the world to know that. We also believe it’s important for the market to set the value of the dollar relative to other currencies,” the president said.

Bush cited low US inflation figures, modest interest rates, job growth, and gross domestic product growth and declared “the underpinnings are strong.”

Asked whether he was satisfied with current exchange rates, Bush replied: “I am satisfied with the fact that we have a strong dollar policy and know that the market ought to be setting the exchange rate.”

This is a harbinger of things to come from Treasury. Probably the G-7 too.

Also coming: a corporate-tax-cut proposal that would strengthen the dollar, grow the economy, and create higher-wage jobs.

The mere fact that the president talked at some length about the greenback is significant. It could possibly reflect administration thinking that it’s time to be more rhetorically aggressive on the greenback. Mr. Bush clearly is inferring that the dollar should be trading more strongly at a higher exchange rate. And this is more than we have heard from Treasury man Paulson on the subject.

It would not be surprising if Mr. Paulson soon delivers a beefed-up dollar support statement of his own at the G7 finance ministers meeting in Cape Town, South Africa. Nor would it be surprising if other G7 ministers echoed the U.S. view.

Markets set currency prices in the world system of floating exchange rates. But markets can err, and err badly, from time to time. For example, there seems to be no reason why the dollar has dropped nearly 10 percent against the euro in recent months. Indeed, perhaps the only reason it has fallen so much is that market traders suspect an uncaring U.S. policy of benign neglect.

Fundamentally, U.S. economic growth and inflation are virtually identical to that of Europe. Interest-rate differentials have narrowed substantially. A kind of trading bubble seems to have developed around the euro, probably because while the Fed acted wisely to reduce its target rate to settle down U.S. financial markets during the sub-prime credit turmoil, the Treasury failed to offer any official support for a steady greenback.

Official support should begin with some stronger-dollar oratory, such as President Bush offered in the television interview. Such support could also develop into some coordinated dollar purchases by the G7 to back up the rhetoric.

Additionally, President Bush may offer a sizable corporate tax cut in his next budget which will be buttoned down after Thanksgiving. That too would strengthen the dollar. Lowering corporate tax rates would promote economic growth, enhance U.S. competitiveness relative to already low corporate tax rates in Europe, and fatten worker wages.

Was Mr. Bush hinting at all this in his Fox interview with my good friend David Asman? Let’s hope so.