Strong Dollar Is a Policy in Name Only

Other than "I love you" and "You're under arrest," few three-word English phrases have as much significance as "strong dollar policy."

The strong-dollar mantra seemingly served the country very well in the latter half of the 1990s, although lately it has become something of an albatross. While the Bush administration probably would prefer a softer dollar, which would help U.S. exporters, it can't publicly abandon the so-called strong dollar policy without risking a run on the currency, if not an outright crash.

"With a $500 billion-a-year current account deficit, you're forced to have a strong dollar policy," said David Gilmore, a partner at Foreign Exchange Analytics. "If you suddenly say 'we want a weaker dollar,' you'll get there in a hurry and it's going to feed on itself. You may end up with a vortex of dollar selling."

Even a far less-dramatic statement can have destabilizing effects, as Treasury Secretary John Snow learned last week, when an impromptu comment helped knock the dollar to a four-year low vs. the euro. By Friday, currency traders were moving on to other issues, such as the weak employment number, and the Dollar Index ended at its lowest level since October 1999. But the flak over Snow's comment that he's "not particularly concerned about" the recent decline in the dollar still reverberates.

Given that the dollar's value is a key barometer of the nation's economic and financial health, a couple of questions arise: Don't economic fundamentals matter far more than any policy statement? And, what exactly is the 'strong dollar policy,' and are we stuck with it?

The answer to the former question is fairly easy: "Words don't mean anything," said Edward Leamer, director of the Anderson School of Business at UCLA. "What matters is what Mr. Greenspan does with interest rates and Mr. Bush with the federal deficit. Those are the only things coming out of Washington that materially affect the value of the dollar."