Dollar's Steep Slide Adding to Tensions U.S. Faces Abroad

This article was reported by David E. Sanger, Mark Landler and Keith Bradsher and written by Mr. Sanger.

WASHINGTON, Jan. 24 - After a first term in which terrorism and war dominated President Bush's foreign policy agenda, his allies in Europe and Asia suspect that his next confrontation with the world could take on a very different cast: a potential currency crisis, in which a steep plunge in the value of the dollar touches off economic waves around the world.

Already, the tensions over the dollar are becoming a recurring source of friction, a conflict that does not reverberate as loudly as the differences over Iraq but may be as deeply felt. At a meeting in Paris on Monday, the finance ministers of Germany and France complained that Europe had unjustly borne the brunt of the dollar's decline, and called for coordinated action to stop it.

"Europe has until now paid too big a share in this readjustment," Hervé Gaymard, the French finance minister, said. His German counterpart, Hans Eichel, said the United States needed to reduce its deficits, adding "each one has to play its role."

Two months ago, similar sentiments came from China's prime minister, Wen Jiabao, whose nation is at the center of a struggle with Washington over currency policy. He complained about the fall of the dollar, asking, "Shouldn't the relevant authorities be doing something about this?"

In an interview just before President Bush's inauguration, Treasury Secretary John W. Snow played down the tensions. "We understand that deficits matter," he said, insisting that the tight budget Mr. Bush is expected to send to Congress next month should give foreigners and the financial markets the solace they seek.

But should the dollar continue to fall - if, for example, global investors determined that Mr. Bush did not have the will to hold spending down - it would not only add to tensions, analysts said. It might also force up interest rates at home to keep foreigners interested in financing America's need to borrow more than $600 billion a year to cover its gap in the current account. The current account is the broadest measure of the trade and financial flows into and out of the country.

To be sure, the dollar's fall may never reach crisis levels, and in the last few weeks, after a more or less steady fall of almost 35 percent against the euro and 24 percent against the Japanese yen over the last three years, the dollar has stabilized a bit. Many experts argue that a further decline, if relatively modest and gradual, is entirely manageable.

Administration officials, along with a number of like-minded economists, contend that the nation's record trade and current account deficits are not particularly worrisome, a reflection more of strong foreign interest in investing in the American economy than any sign of global weakness.

But across Asia and Europe, a wide range of officials and analysts worry that Mr. Bush's economic team may not be up to the challenge of grappling with the issue. They contend that Washington has retreated from efforts to marshal the biggest economies of the world into a mutual effort at more robust and balanced growth.

Many European politicians and exporters cannot shake the suspicion that the Bush administration, despite its statements supporting a strong currency, has been perfectly happy to watch from the sidelines while the dollar heads down.

At a moment of surging American trade deficits that have reached a record share of economic output, a falling dollar makes American exports more competitive and puts imports from Europe at a particular disadvantage.

"It's hard to tell an entrepreneur to wait two years for a policy to change when he says, 'I've got to deliver my goods tomorrow,' " said Anton Boerner, the president of BGA, the Berlin-based association of wholesalers and exporters.

Mr. Snow, for his part, paints a vastly different picture of the international economic landscape. He described the current situation as one of America's remaining the economic envy of the world, where yawning deficits are being addressed and where there is little risk that foreigners will rethink the wisdom of lending the United States hundreds of billions of dollars a year to finance the trade gap and to cover the vast borrowing needs of the federal government.

Mr. Snow suggested some in Europe are seeking a convenient scapegoat, particularly after the tensions over Iraq, to blame for the Continent's own inability to generate stronger growth.

"The current deficit levels are too large," Mr. Snow said, describing himself as a deficit hawk who sees a chance to cut spending because the American economy is growing again. "They have to come down, and they will come down."

But deficits aside, he argued, "overwhelmingly the United States is looked at as the model for success." After years of stagnation in money flowing into the government, "revenues look good," and the turning point will come in a couple of weeks, he said, when Mr. Bush sends a budget to Congress in which "you will see a number of programs that not only don't grow at the rate of inflation, but that decline."

While the budget is a domestic document, assessments of whether it will realistically grapple with the underlying problems and whether Mr. Bush has the political will to push tough measures through Congress may determine whether investors around the world stick with the American economy or head for the exits.

No one knows for sure if the doubts that have already contributed to the dollar's decline will intensify. Some worry that the markets may conclude that Mr. Bush will put the financing of the Iraq war, military transformation and the costs of revamping Social Security ahead of deficit reduction.

Others fret about the risk that a large, highly leveraged hedge fund or a big bank could be caught betting the wrong way in the markets, touching off a sudden currency sell-off that could have implications for the rest of Mr. Bush's term.

"We're at a critical juncture," said C. Fred Bergsten, director of the Institute for International Economics, and a persistent critic of how Mr. Bush's team has handled its global economic role. "The imbalances get worse and worse," he said, rivaling Japan's in the mid-1990's.

"The projection is that they keep rising," he added, noting that the current account deficit is running over 6 percent of the country's gross domestic product. "And it is a trajectory that is bound to crack: people will stop buying dollars, and domestic politics will make the soaring trade deficit with China just unsustainable."

For all those fears, foreign investors are still buying American. While much of that lending last year came from central banks abroad, private investors have shown renewed confidence lately. In November, the last month for which there are reliable numbers, foreigners made net purchases of $81 billion, enough to easily pay for the amount by which American imports exceeded exports.

"Our growth rates are still higher, over the long term, than Europe's and Japan's," said Daniel J. Ikenson, a trade policy analyst at the conservative Cato Institute. Given that, for foreign investors, "there is no reason to think they will sell."

But the argument around the world is as much about leadership as about the long-term strength of the economy. Unlike the debate over war in Iraq, in this case the complaint is not about American unilateralism, but American retreat.

To America's allies, the era in which the world's largest economy also seeks to be the world's economic leader has simply halted. Under both the Republican James A. Baker III and the Democratic Robert E. Rubin, the Treasury Department was viewed as one of Washington's most powerful institutions. It flexed its muscles to trim the market's extremes and stem crises, from an excessively strong dollar in the 1980's to the currency collapses of the 1990's that stretched from Latin America to Asia to Russia.

There has not been an economic crisis of significant magnitude since Mr. Bush came to office. John B. Taylor, the Treasury undersecretary for international affairs, said that is partly a result of preventive maintenance. "My first days on the job we had a crisis in Turkey and one coming in Argentina and Brazil," he said. "Both were contained."

Today the Treasury is regarded as a vastly diminished institution, with comparatively little influence in the White House. Mr. Bush is seen, rightly or wrongly, as far less comfortable dealing with global economic management than he is sitting in the Situation Room, buried in the details of the Iraqi insurgency or Iran's nuclear threat.

As a result, the weakening dollar, to the minds of many from Hong Kong to Berlin, is a metaphor for a presidency so distracted by national security issues that American economic influence has ebbed.

Washington's lack of success so far in pressuring China to finally allow its currency to float, or at least appreciate significantly to reflect its vastly stronger economy, is cited as the most striking evidence of Washington's diminished economic influence. Beijing has used other issues, chiefly the Bush administration's dependence on China to help prevent North Korea's development of nuclear weapons from touching off a wider conflagration, to keep currency demands on the back burner.

That has contributed to a Chinese export surge that has soared to levels almost no one predicted when the United States, Europe and China reached agreement on the accord that brought Beijing into the World Trade Organization at the end of the Clinton administration.

The Chinese, like the Japanese in their heyday, have begun to question American economic policy. American officials say that the Chinese could solve a lot of problems by not linking their currency to the dollar, a step toward solving a trade surplus that looks set to hit a record of nearly $200 billion for 2004. It is a subject of enormous political sensitivity in Beijing, because of its effect on the breakneck pace of China's economic growth.

But Mr. Taylor, the Treasury official, notes that teams of officials have visited China to offer advice about how to manage a floating currency and the Chinese last year hired the Chicago Mercantile Exchange to help it develop a market in currency futures.

"You don't do that," Mr. Snow said, "if you are planning to keep the currency pegged to the dollar."

China is only one piece of the global economic puzzle. The lack of interest by Mr. Bush and Mr. Snow to put together a global accord on currency, akin to the Plaza Accord that Mr. Baker organized in 1985, is viewed as evidence that Washington is content with a downward drift of the dollar. And there is no one to replace the American role.

"It will be a world of chaos without a center," said Hideo Kumano, a senior economist at the Dai-Ichi-Life Research Institute in Tokyo. Japan itself, after a decade of downward spiral that only now seems to be ending, has lost all pretense of assuming the mantle of leadership. Bush administration officials have a deep skepticism bordering on an outright ideological objection to intervening in the markets.

Certainly Beijing, while growing in leaps and bounds, has neither the capacity nor the interest. "China has a big population and big economic growth, but it is not a mature economic system yet," Mr. Kumano noted. "I cannot imagine it replacing Europe or Japan in terms of influence in the world economy. In such a condition, everyone must cope with a world economy where you cannot rely on America."

For all the worries abroad, the Bush administration sees few signs of stress. "You don't have any major economy now in recession, and volatility is low," Mr. Taylor said. "Even inflation is contained in the emerging markets."

But the lesson of the 1990's is that currency crises, like the terror strikes of more recent years, are nearly impossible to predict.

"Financing of the U.S. current account deficit has gone more smoothly than many economists were predicting just a few years ago," wrote Roger M. Kubarych, a former chief economist at the New York Stock Exchange who is now a scholar at the Council on Foreign Relations, a nonpartisan research group.

"But that does not mean that market stability can be taken for granted forever."

David Sanger reportedfrom Washington for this article, Mark Landler from Frankfurt and Keith Bradsher from Hong Kong.

I am pretty convinced that there isn't that much trouble out there with the dollar yet. Right now its mostly lefty types that are getting worked up about it, and mostly just to try to stir up more anti-Bush sentiment.

Since we import their goods, they depend on us to eat. If we do not buy their goods they will starve.

The power of the consumer is what make the market work, and the consumer is always right.

Since the EU is complaining about a weak dollar then this is a good for us. They always complain where we are doing good, and they have been complaining for the last fifty years and they will keep complaining for the next fifty years.

We have so many restrictions and regulations on goods manufactured within the US, (including the labor), that it makes it difficult to competitively price these goods over seas. Of course the dollars fall may reflect the free markets adjustment. My guess is that the difference in export and import has been a result of US companies seeking over seas manufacturing faciltities to make goods cheaper and easier there and then importing those goods back into the US. Of course our consumption of foriegn oil sure does not help the situation.

I just came back from an investment conference where analysts were predicting that the dollar will rally in the next three months and then will begin to drop again losing as much as fifty percent of it's value due to the unsustainable debt overhang.

Consumer debt is now being called the 'third deficit' by some technical analysts. If the three deficits are not reduced the dollar will fall. The only cure is higher interest rates which will wipe out the current recovery.

"China's prime minister, Wen Jiabao, complained about the fall of the dollar, asking, "Shouldn't the relevant authorities be doing something about this?""

Maybe the "relevant authorities" in china should un-peg their currency to the dollar.

It's kind of fun watching the dollar lose value, causing the "No grow zone" (i.e., the Euro Zone) problems. We are just not going to fund their social programs any more. Go get a job, ya damn frogs.

Of course our consumption of foreign oil sure does not help the situation.

Name one industrial nation that is not dependent of foreign oil.

DO you know how much it cost for a gallon of gas in Western Europe? It cost 7 dollars for a gallon of gas, yes seven dollars.

We are still in the best economical shape in the world, and by far.

You said..."I am pretty convinced that there isn't that much trouble out there with the dollar yet. Right now its mostly lefty types that are getting worked up about it, and mostly just to try to stir up more anti-Bush sentiment."

Somebody said fairly recently..."The administration and the federal reserve had better act soon to shore up the U.S. dollar. The dollar is deteriorating almost daily against the euro and the yen. A panic attack on greenbacks is imminent if the Fed doesn't act soon to mop up excess liquidity. The last thing we need now is a currency crisis. John Kennedy had it right 40 years ago when he observed that strong states have sound currencies."

Which "lefty" said the statement quoted above...
a) Howard Dean
b) Dennis Kucinich
c) Steve Forbes

They contend that Washington has retreated from efforts to marshal the biggest economies of the world into a mutual effort at more robust and balanced growth.

In other words, they want us to give them more of a free ride.

Not anymore. the EUrons, in particular, can go Cheney themselves.

The Feds actually ran a budget surplus in July. Given strong job growth (which will push some of the big increase on corporate profits into wages), the Fed deficit should disappear in about 2 - 3 years and that should also ease the debt burden. Imports would tend to increase if our economy picks up more steam, but the falling dollar should reduce imports, except in cases of commodities that must be imported like oil.

What all these financial shamans are hoping for is a sharp rise in interest rates, raising the dollar to make them bigger players in world markets again.

They can go to hell.

Leave it to the economic geniuses of the NYT to misrepresent and misinform the people.

At the bottom of the graphics the ignoramus states:

"The US runs a deficit with every major trading partner, REQUIRING it to borrow billions from abroad to cover the gap."

We don't go out and beg other countries to buy our treasuries and bonds! The other countries choose to buy our securities before all the others that are available. They create the demand - and the prevailing low interest rate is a testament to the high demand.

Since we import their goods, they depend on us to eat. If we do not buy their goods they will starve.

The power of the consumer is what make the market work, and the consumer is always right.

A consumer who digs himself further into debt will soon run out of power

You can poh-poh the economic problems all you want. Just because the wolf-criers have jumped the gun, doesn't mean the day of reckoning will never come. A 3rd world America is not a matter of if, but when.

Dear Chairman Greenspan:

Lower the rate again! Do it, please! Don't let those counter-culture punks in their daddies' chairs tell you what to do! We want deflation, and we want new blood!

As I said, mostly lefty types. Of course there is cause for concern, but it isn't as bad as many are making it out to be right now. I have an acquaintance that sends me the "sky is falling" crap all the time. I am not buying it yet.

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