Dollar slide raises worries worldwide -- but government action likely to be only words for now
By Pan Pylas, AP Business Writer
LONDON (AP) -- Concerns worldwide about the dollar's slide have escalated to the point where currency traders are beginning to wonder when governments might try to do something about it.
For now, any attempt to put a floor under the dollar's exchange rate is expected to remain rhetorical, with actual market interventions by central banks unlikely -- especially if China won't change its currency policy.
But with the dollar sagging against the euro, the yen and a host of other peers, policymakers around the world are voicing worries a weak dollar will dampen their still-shaky economic recoveries. A falling dollar hits exporting countries because they find it more difficult to sell their products to the U.S.
A weak dollar also raises the cost of commodities such as oil, which are priced in the U.S. currency.
So far, currency traders have largely ignored escalating rhetoric from government officials. They pushed the euro above $1.50 on Wednesday for the first time in 14 months and it hovered round that level all day Thursday.
And the dollar could get weaker yet, if the stock market rally has further legs. That's because dollar investments were used as a refuge as markets tanked. Now that markets are rising, that money is flowing back out of the dollar safe haven into stocks or emerging-market currencies.
And so far, the third-quarter U.S. corporate results season has been strong -- around 75 percent of companies that have reported so far have beaten expectations. Larger U.S. budget deficits weigh on the dollar, as do Federal Reserve efforts to spur the economy, such as low interest rates and efforts to expand the supply of money.
At some point, governments could consider intervention -- buying dollars to drive up its exchange rate. Or they could start hinting more strongly to markets they might consider such a step, which could have much the same effect.
"Assuming that the euro closes above $1.50 this week it technically has plenty of open ground on the run up to the record high of $1.6040 hit in July 2008, but there will also be plenty of official resistance to limit its appreciation," said Mitul Kotecha, head of global foreign exchange strategy at Calyon Credit Agricole.
"Such resistance may currently be limited to rhetoric, but it will not be long before markets begin discussing the prospects of actual intervention," he added.
The dollar's current slide has recalled memories of the coordinated intervention of September 2000. Then, the U.S. Federal Reserve, European Central Bank, Bank of England and Bank of Canada intervened to stop an alarming drop in the euro that threatened competitiveness of U.S. companies. The central banks bought billions of euros with dollars and yen. The risky move helped halt the euro's slide.
Today, however, analysts think any successful intervention to stem the dollar's fall would require not just support of U.S. authorities. It would have to also involve the Chinese, who have kept their currency artificially low against the dollar. That helps them boost their exports to the United States -- and China has been cool to suggestions it ease its currency practices.
But that could change if the Chinese start to fret about inflation. Premier Wen Jiabao told a Cabinet meeting Wednesday that policy will focus on balancing economic growth while managing inflation. Analysts said it that could mean that the Chinese authorities might even allow their currency to rise against the dollar. That would reduce the costs of imports and help keep inflation down.
In turn, that would ease some of the upward pressure on the euro, which has been bearing the brunt of the dollar's adjustment -- a move that by itself could lessen any need for Western central banks to intervene.
And it would also help cut China's massive trade surplus with the United States, a key objective of the Group of 20 rich and developing countries.
The arena for any coordinated action could be the G-20 finance ministers meeting at St. Andrews, Scotland early next month.
"The topic of China's exchange rate can be expected to get increased attention in the approach to the next G-20," said Jane Foley, research director at Forex.com.
Some finance ministers in attendance may have reached their dollar pain thresholds. Already this week, Canada's Jim Flaherty expressed worries the U.S. dollar could derail his country's recovery, while Brazil's Guido Mantega has announced a 2 percent financial transaction tax on foreign investment flows. That was intended partly to curb the rise in the value of the Brazilian real against the dollar.
Europeans have started expressing concern. European Central Bank president Jean-Claude Trichet has for weeks been warning that "excessive volatility" in exchange rates could damage economic and financial stability.
For the U.S. to agree to intervene, however, the current dollar decline will have to turn into a rout. President Barack Obama's administration says it wants a strong dollar -- but the fact is, a weaker dollar helps U.S. exports and the country's recovery.
"Unless the dollar collapses, the U.S. is unlikely to feel compelled to adjust its policy levers," said Bank of New York Mellon currency strategist Neil Mellor.
Sung Won Sohn, an economist at California State University's Smith School of Business, said European officials will likely begin talking about the need to halt the dollar's decline without actually intervening in currency markets.
He said in the United States, the Obama administration will keep stressing that a strong dollar is in America's best interests while tacitly sitting back and watching the dollar decline in value.
As long as the dollar's fall doesn't threaten to turn disorderly, the administration is happy to see it weaken gradually, Sohn said.
"We say we are for a strong dollar but the administration is not all that anxious to see the dollar appreciate," Sohn said. "A weak dollar creates jobs in the United States by boosting exports and right now as we try to get out of this recession, we need to create more jobs."
AP Economics Writer Martin Crutsinger in Washington contributed to this report.