Forex: Paulson Confirmed Without Chanting Dollar Mantra

In January 2003 Snow found the dollar mantra so key to his confirmation that he put it in his written statement anticipating questions on dollar policy in his Senate Finance confirmation hearing. O'Neill found it so important that he stated it at his confirmation hearing in January 2001 after reading his prepared remarks and before taking questions from the Senate Finance Committee meeting.

But in Paulson's Senate Finance confirmation hearing (and in 149 written responses to written questions from the Committee), he never said a strong dollar is in the interest of the US and exchange rates are best set in open and flexible markets.

How significant is this? I think it is curious at least and very significant at most.

While it is unlikely that Paulson has permanently shelved the dollar mantra, he decided it was not sufficiently important to utter the mantra without prompting, something O'Neill and Snow dared not do, though prepped to chant it if asked. One could say that since O'Neill and Snow were from manufacturing/industry backgrounds, they would have a natural propensity to advocate a weak dollar and hence needed to address dollar policy straight out of the blocks, voluntarily. Paulson on the other hand has the Wall Street "cred" that Snow and O'Neill were lacking. But this overstates Paulson's Wall Street experience. As an investment banker often representing US manufacturers and not from the trading side of Goldman Sachs like Bob Rubin, one would think it is quite important to state support for a key plank of international economic policy at the Treasury since the mid-1990's.

And topically speaking, the dollar is still very much in the crosshairs of officials in the US and globally including members of Congress, central bankers, finance ministers and multilateral officials (IMF, BIS and OECD). G7 and the IMF in late April was mainly about addressing global imbalances and the adjustment process and this was captured in a significantly reworded G7 communique. At the IMF meeting on imbalances April 21 that preceded the G7 meeting, officials agreed that the adjustment process involved a shared burden including an orderly fall in the dollar led by markets. This was not a call for a lower dollar (only call on FX was for a higher yuan and higher non-Japan Asia currencies), but a recognition of macro 101 axiom...record, unsustainable US current account deficit implies a lower dollar...and not as the main or only channel for adjustment, but one of several channels.

While Paulson was never asked specifically about his views on dollar policy, he was asked if a weaker dollar had a role to play in the adjustment process in a written question by Senator Baucus. He said nothing about the dollar...Baucus asked too if he would seek a Plaza-like solution. Paulson observed only that the US is a preferred destination for foreign investment which is a sign of strength in our economy. He said only he looked forward to working with other major economies on implementing policies that will lead to faster, more balanced growth abroad and will address the imbalances.

Paulson deserves some benefit of doubt...he has set a record on the confirmation process...hours really for full Senate confirmation vote and unanimous at that. So his ability to wrap his arms around the intricacies of Treasury policies past and present were limited. However, the dollar policy and mantra has to be something he is about as familiar with as the Pledge of Allegiance.

At most the new Treasury Secretary wants greater freedom on dollar policy and the shackles of the Rubin strong dollar policy is no longer optimal and the policy is dead. If so, which I still doubt, would not be the equivalent of adopting a weak dollar policy or as Baucus said a Plaza-like solution to the adjustment process.

At the very least the break from tradition on clarifying his support for the strong dollar policy in his confirmation hearing represents a deliberate effort by Treasury to gradually retire the strong dollar policy...make it irrelevant via ever reduced emphasis and chanting.

It is fair to say that the strong dollar policy of the Rubin and Summers Treasury is not the same as the strong dollar policy of the O'Neill, Snow, Taylor and Adams Treasury. Rubin and Summers used the mantra to influence the level of the dollar. O'Neill and Snow used it only out of legacy (one could argue that O'Neill used it once to support the dollar after he told a German reporter there was no strong dollar policy per se and the dollar sank...generating the Yankee Stadium reference) and to assure investors that an "invisible" safety net was in place.

From day one the Bush international economic policy has been driven by the
belief that markets on their own get currencies and the dollar right and that governments including this one are best to leave markets to their own making. It is no coincidence that there has never been a time in 5 1/2 years of the Bush Presidency that currency intervention by US authorities was a distinct risk. It was never even a remote risk. To a large extent a dollar policy is at odds with the faith in markets getting exchange rates right.

I am confident we will hear Paulson utter the mantra at some point in time, sooner than later, when a member of the press gets to clarify this curious situation. But we should also stand back a bit and recognize that this week's confirmation hearing and the silence on the dollar speaks volumes. The Treasury believes in focusing on policy measures that will facilitate adjustment like increasing foreign demand and domestic savings and letting markets handle the dollar's role in the adjustment process. Outside of the halls of MoF and the French Finance Ministry, there is near unanimity in belief that markets will in time take the dollar lower.

David Gilmore
FXA
www.fxa.com