LONDON: The United States is set to weaken its seven-year commitment to the ‘strong dollar policy’ this week and accept the greenback’s slide on the world markets. This tacit devaluation will come as figures out next week show that the US economy hit a wall in the last quarter.
Senate confirmation hearings for Treasury Secretary nominee John Snow on Tuesday are likely to reveal a new ‘neutral’ stance on the dollar.
“The strong dollar policy is now a liability rather than an asset for the US economy,” said Stephen Jen, currency economist at Morgan St Stanley. “I am looking for a new definition of dollar policy that would be an implicit endorsement of the on-going correction of the dollar.”
The Senate finance committee has been lobbied fiercely by industrialists and politicians who believe that an overvalued currency has suffocated US manufacturing. The lobbyists hope to pin down Snow, a railway executive, and persuade him to move out of the shadow of Robert Rubin’s strong dollar mantra, first aired in 1995.
In the past month the dollar has been falling of its own accord. The slide began in December after the sackings of Paul O’Neill, the previous Treasury Secretary, and Larry Lindsey, the White House chief economist. The dollar quickly slumped by three per cent against the euro. Since then it has been pummelled by market uncertainty over international splits on invading Iraq.
“The theme is ‘flee the dollar’ on the Iraq scenario and the likelihood the US is going to launch a unilateral attack against world opinion,” said Mike King, a trader at Commerzbank.
Dealers say that the market is reluctant to hold dollars ahead of Jan 27 United Nations inspectors’ report and President Bush’s state of the union address on Tuesday.
Since December the dollar has slumped against the euro, reaching a three-year low of 92.5 cents to the euro (euros 1.08 to the dollar) at Friday’s close.
“We are on the verge of a possible dollar crisis given this unusual period where investors don’t like any US assets — bonds, equities, or the currency. But it’s also clear that the US economy needs all the help it can get,” says Avinash Persaud, managing director of research at State Street Bank.
Economists at Lehman Brothers believe that the US economy is ‘dead in the water’. Thursday’s fourth quarter GDP growth figures will show US growth slumping to zero, say Lehman.—Dawn/The Guardian News Service.
