Markets think US is happy with weaker currency

ANALYSIS: Greenback's slide against euro will focus minds of G8 finance ministers at their French summit, writes Conor O'Clery, in New York

The US dollar's fall by 28 per cent against the euro over the past year - and 17 per cent over the past six months - has encouraged speculation in US financial markets that the Bush administration is encouraging a weak dollar to help revive a sluggish American economy ahead of the 2004 presidential election.

The slide of the greenback against the euro and other major currencies is causing worldwide concern and is likely to dominate the meeting of the Group of Eight finance ministers in Deauville, France, on Saturday.

The lower dollar value is hurting, in particular, many European companies that sell goods and services to the United States and has been blamed for the weak first-quarter performance of major EU exporters.

At the G8 meeting, European finance ministers are likely to express their apprehensions to US treasury secretary John Snow that the decline in the dollar is threatening to stifle Europe's economic recovery.

Mr Snow seemed to signal that the depreciation was acceptable to Washington when he said on Sunday: "When the dollar is at a lower level it helps exports, and I think exports are getting stronger as a result."

His comment pushed the dollar to a four-year low against the euro on Monday.

In fresh remarks published yesterday, Mr Snow emphasised that currency intervention should be kept to a minimum.

"As I've said on various occasions, devaluation strategies are not well calculated to breed long-run domestic prosperity," Mr Snow told Reuters in an interview recorded on Friday. "You can't devalue your way to long-term high standards of living."

The US administration moved quickly to prevent a more serious run on the dollar as a result of the treasury secretary's remarks. White House spokesman Ari Fleischer told reporters, Mr Snow "knows that the position is support for a strong dollar".

However, this re-statement of Washington's policy - a formula that has not varied for years - had little impact on a trend that economists say reflects economic realities, with the dollar's decline due primarily to the large and growing US trade deficit.

The US current account deficit of $500 billion (€432.6 billion) is now almost 5 per cent of gross domestic product. A larger-than-expected trade deficit in March sparked another wave of early dollar selling yesterday.

The deficit in international trade in goods and services was $43.46 billion in March, up from $40.37 billion in February, the US Commerce Department said.

A large trade gap drives down the dollar's value because the US needs to attract more foreign investment to sustain its current account deficit. This is hampered by lower interest rates in the US than in other world economies.

A further reason for the decline of the greenback is that the US Federal Reserve is simply printing more dollars than the European Central Bank is printing euros, says Mr Brian Wesbury, chief economist of Griffin, Kubik, Stephens & Thompson of Chicago.

He warned that the falling dollar would "eventually show up as higher inflation and interest rates" in the United States.

With inflation well under control and interest rates at their lowest since the early 1960s, many American manufacturers see no downside to a down-graded dollar. Indeed, corporate America has been pressing the White House for years to devalue the dollar.

A weaker dollar may also fit in with the overall goals of the Federal Reserve, whose chairman Mr Alan Greenspan warned recently for the first time that the risk of deflation in the US was greater than the risk of inflation.

This trend would be countered by more expensive imports resulting from stronger foreign currencies.

The US may be tempted to talk up the dollar if it sees a slump in Europe having a negative impact on a US recovery. Observers also say the greenback could bottom out against the euro if the ECB cuts rates in the euro zone.

In Geneva yesterday, the managing director of the International Monetary Fund, Mr Horst Koehler, said the depreciation of the dollar was still within "orderly" limits but that any acceleration in its decline should trigger an international reaction.

The Wall Street Journal reported yesterday that despite the dollar's depreciation, flows of foreign investment into the US were holding up reasonably well, though a more rapid slide would make American investments less attractive.