The Falling Dollar

CAMBRIDGE – When the euro’s value reached an all-time high of $1.52, Jean-Claude Trichet, the president of the European Central Bank, told the press that he was concerned about its rapid appreciation and wanted to “underline” the United States Treasury’s official policy of supporting a strong dollar. Several European finance ministers subsequently echoed a similar theme.

In reality, of course, the US does not have a dollar policy – other than letting the market determine its value. The US government does not intervene in the foreign exchange market to support the dollar, and the Federal Reserve’s monetary policy certainly is not directed toward such a goal. Nor is the Fed specifically aiming to lower the dollar’s value. Although cutting the Federal Funds interest rate from 5.25% in the summer of 2007 to 3% now contributes to dollar depreciation, this has been aimed at stimulating a weakening economy.

Nevertheless, all US Treasury secretaries, going back at least to Robert Rubin in the Clinton administration, have repeated the mantra that “a strong dollar is good for America” whenever they were asked about the dollar’s value. But, while this seems more responsive than “no comment,” it says little about the course of current and future US government action.

Indeed, the Treasury’s only explicit currency goal now is to press the Chinese to raise the value of the renminbi, thereby reducing the dollar’s global trade-weighted average. The pressure on China is, however, entirely consistent with the broader US policy of encouraging countries to allow the financial market to determine their currencies’ exchange rate.