Weighing up the true cost of a strong dollar

Maintaining a strong dollar is easy when everyone wants to buy it. But as the US currency falls, the world's jittery financial markets are reflecting that they may be about to find out whether words will be backed up with action.

The most likely answer is that a strong dollar is one strong enough not to threaten the buoyancy of fragile US asset markets, analysts say. Mr Alan Ruskin, research director at the economic consultancy 4Cast in New York, says the strong dollar policy was closely associated with one man: former Treasury Secretary Mr Robert Rubin. " Lloyd Bentsen, his predecessor, was happy deliberately to weaken the currency to boost exports as part of an aggressive trade policy," Mr Ruskin said.

But, after his appointment in 1995, Mr Rubin started to repeat the phrase that a strong dollar was in the US's interests until it became a mantra. Mr Larry Summers, who took over from Mr Rubin a month ago, has been at pains to stress continuity with his predecessor.

Mr Ruskin says the fabled policy means "little more than that the dollar should not be used as a tool of trade strategy". But a strong dollar means more than just a floating dollar. If the currency slumps, it could have serious consequences for the US economy.

Mr Summers faces a yawning current account deficit, predicted to exceed $300 billion (€278 billion) this year. This requires rising asset prices to suck in capital from overseas investors, who, in turn, need a strong dollar to protect the domestic currency value of their holdings. Take away either the dollar or asset market pillar and the whole precarious edifice could come crashing down.

With recent falls in the shares of Internet companies, together with sliding bond prices as the threat of interest rate rises from the Federal Reserve has grown, investors are nervously reassessing whether the US is still the best place to put their money.

Many speculate the risks to the US economy mean the currency may not be allowed to fall as freely as it rose. So will Mr Rubin's other legacy - a marked reluctance to intervene in the foreign exchange markets - be preserved as well?

So far the dollar's decline has been relatively slow. Few think that US intervention to support the dollar is imminent.

But financial market participants say US policymakers are only too aware of the potential for a gentle decline to turn into freefall.

Mr Summers may become famous as the man who inherited a strong dollar policy . . . and then had to decide what it meant.