The Blog

Snow Job

What's happening with George W. Bush's "strong dollar policy," and what does it mean for the rest of the world?

11:00 PM, Nov 22, 2004 • By IRWIN M. STELZER
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THERE IS INDEED something new in financial markets: overseas followers of the Bush administration's so-called "strong dollar policy" are learning the meaning of the American colloquialism "Snow job." As America's traders know, that means deception, accomplished by burying the listener under a meaningless flow of what Eliza Doolittle contemptuously called, "words, words, words."

When Treasury secretary John Snow last week once again assured the world that the United States is devoted to "a strong dollar," traders snorted "Snow job," and continued to sell dollars. In China, long lines formed at banks as depositors withdrew their dollar accounts and converted them to euros, yen or even China's own currency. The few dollar bulls that can be found think the decline will end soon, because they expect China to respond to the pressure that President Bush is exerting in an effort to get that country's authorities to relax the yuan's peg with the dollar, allowing the American currency to rise against its Chinese counterpart. My guess is that the Chinese authorities will continue to say the right words about their long-run intentions, and might even allow a tiny adjustment. But it will not be of a sufficient magnitude to have a major impact on currency markets.

So Europe will continue to find itself hit by a double whammy, the "brutal" effect on Europe's already sclerotic economies that has Jean-Claude Trichet, president of the European Central Bank, so upset. The euro is bearing almost the entire weight of the falling dollar, making euroland exports dearer in America. Meanwhile, the Chinese currency falls along with the dollar, giving China's exporters an even greater competitive edge in Europe's markets. This is not all bad. As Nicholas Garganas, governor of the Bank of Greece, told the Financial Times, the strong euro is offsetting the inflationary impact of higher oil prices, since it now takes fewer euros to buy the dollars that are used to pay for oil.

EUROPE'S POLITICIANS have serially found excuses for their nations' stagnation, rather than reforming their labor and product markets, and lowering the crushing burden of taxation. But even for them it is stretching things to blame the euro's climb against the dollar for their economies' failure to grow, and persistently high long-term unemployment. After all, so far this year the euro has risen only 3.5 percent against the dollar, the smallest increase in the past three years. And eurostagnation preceded the recent dollar dip.

By contrast, the American economy is powering ahead. Industrial production rose in October, and was 5.2 percent above last year's level. Housing starts in October were 6.4 percent above the prior month, and 2.2 percent above the October 2003 level. Retail spending was up sharply last month. Consumer confidence is up, partly as a result of the improving jobs market, and partly because the widely anticipated post-election delay in naming a winner didn't happen. Share prices are so buoyant that a New York Times headline reads "It Feels like the 90s," and one in the Wall Street Journal refers to the "Current Mood of Euphoria."

Indeed, we hear less talk that the Federal Reserve Board's monetary policy authorities, having raised interest rates to 2 percent, might stop there. Not only is the economy doing well, but inflation picked up last month. Wholesale prices rose in October by 1.7 percent, the largest increase in 15 years. Energy prices led the parade: no surprise there. But food prices (+1.6 percent), floor coverings (+0.8 percent), and construction machinery (+2.7 percent) also jumped. At the consumer level, food, housing, and apparel prices were up in the past three months at annual rates of 3.4 percent, 2.6 percent, 2.3 percent, and medical care prices rose even more, by 3.9 percent.

It is not at all certain that this recent past is prologue. Industrial production may be up, but part of the increase "appears to reflect a partial bounceback from the restraining effects of the recent hurricanes," says the Fed. Housing starts may be up, but the number of building permits, a predictor of future activity, is running 1.5 percent below October 2003 levels. The price indexes may be up, but gasoline prices are easing, and food prices should come down when production returns to pre-hurricane levels. And the index of leading indicators, which is supposed to predict future economic activity, was down last month.