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Oil Currency Hypocrisy

It makes no sense for the Bush administration to be supporting oil-exporting countries' hard dollar exchange-rate pegs while simultaneously blasting Asian countries for not letting their currencies appreciate faster against the dollar. Indeed, the US should be supporting the IMF’s behind-the-scenes efforts to promote de-linking of oil currencies and the dollar.

CAMBRIDGE – Does it make sense for United States Treasury Secretary Hank Paulson to be touring the Middle East supporting the region’s hard dollar exchange-rate pegs, while the Bush administration simultaneously blasts Asian countries for not letting their currencies appreciate faster against the dollar? Unfortunately, this blatant inconsistency stems from the US’s continuing economic and financial vulnerability rather than reflecting any compelling economic logic. Instead of promoting dollar pegs, as Paulson is, the US should be supporting the International Monetary Fund’s behind-the-scenes efforts to promote de-linking of oil currencies and the dollar.

Perhaps the Bush administration worries that if oil countries abandoned the dollar standard, today’s dollar weakness would turn into a rout. But the US should be far more worried about promoting faster adjustment of its still-gaping trade deficit, which in many ways lies at the root of the recent sub-prime mortgage crisis. The administration’s multi-pronged effort to postpone pain to US consumers, including super easy monetary and fiscal policy, only risks a greater crisis in the not-too-distant future. It is not at all hard to imagine the whole strategy boomeranging in early 2009, soon after the next US president takes office.

Of course, a strengthening of the oil currencies (including not only the Gulf States, but also other Middle East countries and Russia) would not turn around the US trade balance overnight. But oil countries do account for a large share of the world’s trade surpluses, and a weaker dollar would help promote US exports to some degree, even in the short run.

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