All eyes on the dollar

2010-10-23 10:28

For US treasury secretary Timothy Geithner, a weaker dollar may now be in the US national interest.

The dollar has dropped more than 7% since August 27, when chairperson Ben Bernanke signalled the Federal Reserve was prepared to ease monetary policy. Where once such a decline may have been met with resistance from the US, Geithner may now be tolerating it as a way of bolstering the recovery.

Companies from Costco Wholesale to Deere have credited the weaker dollar with giving their earnings a boost. And the currency’s slide has helped propel the Dow Jones industrial average above 11 000 for the first time since May. Higher stock prices in turn are bolstering consumer and business confidence. The danger is if the decline gets out of hand – fuelling increases in the cost of living over the long term and prompting investors to avoid US debt.

“In an era where deflation pressures appear to be the greatest risk, growth is below trend and the US wants to boost exports. Why would they not want a weaker dollar ” says Jim O’Neill, chairperson of Goldman Sachs Asset Management.

“The answer is when it becomes a problem for financial markets. Until then, it’s a straightforward strategy.”

The US currency is slipping in reaction to a decline in interest rates that’s making US assets less attractive to overseas investors.

The dollar is trading near parity against its Australian counterpart for the first time since 1983 and is close to its weakest against the yen in 15 years.

Geithner said the US would preserve confidence in a “strong dollar”.

He said the US “will not engage” in currency devaluation.

A weaker dollar can help the economy by making US products less expensive in overseas markets and by boosting the overseas earnings of US companies in dollar terms. As the cost of imports rises, American consumers switch to US-made goods, and domestic producers face less competition from abroad.

Companies in the S&P 500 that earn more than half of their revenue abroad have returned about 5.1 percentage points more than those whose sales have come mostly from the US since the start of September, according to data compiled by Bloomberg.

Costco, the largest US warehouse club chain, is benefiting from foreign exchange “tailwinds”, chief financial officer Richard Galanti said earlier this month.

He said the dollar’s decline in many of the countries where the company operates had increased sales by about $1.6 billion (R11 billion) over the course of the fiscal year.

Deere, the world’s largest farm equipment maker, said in August that net sales of worldwide equipment operations rose 6% in the nine months to July 31 from a year earlier, including a favourable currency translation of 3%.

Lawson Software, a provider of business management software to Safeway and the Mayo Clinic, said appreciation of the euro in the quarter to August 31 boosted sales above projections.

The economic benefits of a weaker currency give Geithner reason to downplay the “strong dollar” policy first articulated in about 1995, when he was deputy assistant treasury secretary under Robert Rubin, who served as the treasury secretary from 1995 to 1999.

“Geithner’s comments recently have not exactly been dollar supportive,” said Barry Knapp, chief US equity strategist at Barclays. “Typically what happens is that the treasury either says we support a strong dollar or we think a free market should decide where the dollar goes, and that means we don’t mind if it goes down.”

That doesn’t mean the administration is actively trying to drive down the currency, which investors may interpret as a US effort to devalue its way out of debt, says Jacob Funk Kirkegaard, a senior fellow at the Peterson Institute for International Economics.

Even if the US is not trying to push the dollar higher, “you can’t say that that amounts to having an active policy to drive down the dollar”.

Geithner this month blamed China’s policy of limiting gains in the yuan for contributing to a “damaging dynamic” of capital controls and currency market interventions by emerging economies.

“It is very important to see more progress by the major emerging economies to more flexible, more market-oriented exchange rate systems,” he said.

A weaker dollar may be a relief for the US economy, with an unemployment rate that is forecast to exceed 9% through next year, according to the median estimate in a Bloomberg survey of economists.

In his State of the Union address in January, President Barack Obama said US jobs would depend in part on the country’s ability to boost overseas sales. Meeting his target would mean exports reaching $3.14 trillion by 2015 from $1.57 trillion in 2009, according to the White House.

Brazilian finance minister Guido Mantega, who has spoken of a “currency war”, said the country would increase a tax on foreigners’ investments in fixed-income securities to 6% from 4%. The tax on foreign investors’ margin deposits for futures markets would climb to 6% from 0.38%, Mantega told reporters in Sao Paulo.

India’s central bank might intervene in currency markets if the rupee appreciated past 43 against the dollar, a finance ministry official with knowledge of the matter said on Monday.

– Bloomberg

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