Strong Dollar Is a Policy in Name Only

Certainly, Japan's experience shows the folly of policy statements and even outright intervention, as the country has repeatedly failed to stem its rising yen.

To many observers, rising trade and federal budget deficits here, combined with slowing economic growth and opposition to U.S. foreign policy, mean dollar weakness is inevitable, regardless of what policymakers say. The U.S. reported a record $435.2 billion trade deficit in 2002, and record-setting budget deficits above $300 billion are projected for fiscal 2003 and 2004, even excluding the cost of any war with Iraq.

The answer to the latter question is murkier.

Slogan Makes History, Moves Markets

In hindsight, the "strong dollar policy" is something of a misnomer, and a burr under the Bush administration's saddle.

"A strong dollar is in the national interest" was first uttered by then-Treasury Secretary Robert Rubin in 1995. To the exclusion of almost anything else, Rubin incessantly repeated the phrase during the remainder of his tenure. Successor Larry Summers duly picked up the mantra.

The dollar was far weaker in 1995, during which it hit post-World War II lows vs. the yen and German mark. Rubin's comments were a rhetorical extension of the Federal Reserve's repeated efforts from 1994 through August 1995 to intervene in currency markets and strengthen the dollar, often with support of other central banks. Recent weakness notwithstanding, the dollar is far stronger today, a huge impediment to U.S. exporters.

After some intervention to support the dollar in the early days of Rubin's tenure at Treasury, the U.S. intervened to weaken the greenback vs. the yen in 1998 and the euro in 2000.

Rubin "never said a rate of any currency to associate with [the strong dollar policy], never defined it at all beyond saying it," recalled Lara Rhame, senior economist at Brown Brothers Harriman. "To that extent, when you say 'what is it?' it's just the repetition of those words, and nothing else."