Time for Paulson to Rescue the Dollar?

So far, the White House has let the markets decide the greenback's fate.

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Anyone who watched U.S. Treasury Secretary Hank Paulson's caffeinated—if not somewhat manic—press-conference performance last Friday evening at the end of the G-7 meetings might be forgiven for thinking that the former Goldman Sachs CEO needed a long, restful weekend. It had been a busy week, after all. In addition to hobnobbing with financial ministers from the major economies—and keeping an eye on the plunging Dow—Paulson announced an $80 billion rescue fund for big banks stuck with illiquid asset-backed debt securities. He also gave a gloomy speech on the housing market. That being said, might it be time for him to devote some precious energy and attention to the falling dollar? As CNBC's Lawrence Kudlow put it in his latest syndicated column:

Wouldn't this be a good time for Mr. Paulson to signal that enough is enough, and call a halt to the dollar's decline? Oil prices are rising. Gold prices are rising. And currency traders around the world have set up huge short-selling positions in the greenback. But a few strong words from Mr. Paulson, coupled with a few well-timed rounds of dollar-buying, could turn the U.S. currency story around.

Indeed, the Bush administration hasn't intervened to boost the dollar a single time since taking office, only offering the usual rhetorical boilerplate about the value of a "strong dollar." And that policy seems unlikely to change, barring a catastrophic plunge. The dollar was not even mentioned in the post-meeting communiqué from the United States. As economist Robert Brusca notes in a letter to clients:

But the U.S. Secretary when asked about the dollar and language about cooperation did not say anything about the dollar's recent weakness at all (he did NOT call it undesirable or term it something to be reversed). Sometimes it is what they don't say that is as important, or more important, than what they do say. And the attention paid to the language of "cooperation" did not result in any favorable comments made by Paulson about the potential for FX intervention.

As one Wall Street economist told me over the weekend:

It's a hard-core position of the U.S. side that, barring outright turmoil, there is little purpose in [foreign exchange] intervention. This certainly seems to be the position of this administration. Of course, this is not the attitude of the Japanese. Without an agreement from the U.S. side to conduct coordinated intervention, intervention by the Europeans would be futile.

Would a currency intervention work? You could argue that with so many traders betting one way on the greenback, just the right amount of financial pressure at the right moment and right place would be tantamount to a sort of financial jujitsu move that would reverse the dollar's downward momentum. Then again, today's huge, high-velocity currency markets might shake off a currency intervention like a burly fullback shedding a lightweight tackler. Paulson might face a currency version of Alan Greenspan's interest-rate "conundrum" when global credit markets seemed to ignore his moves to raise interest rates.

Look, over the long run, a country's currency reflects a country's economic strength. So anyone worried about the dollar should be advocating policies that strengthen the American economy. Perhaps traders were looking forward to the unveiling this week of House Ways and Means Chairman Charles Rangel's huge tax overhaul plan and finding it antigrowth. Indeed, a 2001 study from the Federal Reserve Bank of New York found that "an analysis of the link between the dollar's movements and productivity developments in the United States, Japan, and the euro area suggests that productivity can account for much of the change in the external value of the dollar over the past three decades." Want to boost the dollar? Implement pro-growth, pro-innovation, and pro-productivity policies.