Bush not worried at decline of the dollar

US PRESIDENT George W Bush’s administration is untroubled by the dollar’s decline, which may help boost sales and manufacturing jobs in an election year without an acceleration of inflation or higher interest rates.

In Europe, leaders are increasingly concerned that the euro’s 22% gain against the dollar in the past year threatens an economic recovery dependent on exports. Italian Prime Minister Silvio Berlusconi said last month the euro’s exchange rate is “very high”.

French Prime Minister Jean-Pierre Raffarin said on December 16 there are currency limits “that can’t be breached”.

As the euro heads past a record $1.26, 7.7% higher than its 1999 start, European Central Bank policy makers including Arnout Wellink and Guy Quaden are uneasy about the pace of the increase. European officials may also raise pressure on Asian countries to stem currency sales and let their currencies rise more against the dollar before finance ministers from the Group of Seven nations meet in Florida on February 7.

“The focus will soon shift to the G-7 and there will be some jockeying ahead of that,’ said Marc Chandler, chief currency strategist in New York at HSBC Securities USA Inc. “The US will resist, so I’d be surprised if the G-7 can agree on stopping the dollar’s slide. Europe is more troubled.”

The euro rose to a record $1.2697 in London yesterday after Federal Reserve Governor Ben S. Bernanke said in a speech in San Diego the risk of a dollar crisis is “quite low” and valuing the currency only against the euro may be “misleading”. The dollar also fell to 106.76 against the Japanese yen.

For the US, the dollar’s decline provides another source of economic growth along with $1.7 trillion in tax cuts since Bush took office and the lowest Federal Reserve interest rates in 45 years. The currency’s drop should help prevent falling prices and give US manufacturers an edge abroad by making their goods cheaper. It has also already saved 700,000 manufacturing jobs, according to Global Insight Inc., an economic forecaster.

Europe and the US this year may become more adamant that Asia, and particularly Japan, halt sales of its currencies.

The Bank of Japan spent a record 20.1 trillion yen ($190 billion) last year in a bid to stem the currency’s appreciation.

The Bank of Japan’s sales help explain why the euro rose twice as fast against the dollar as the yen in 2003. In its five years in charge of monetary policy for the euro region, the ECB has only acted to boost the euro, by buying the currency in 2000, and hasn’t sold euros to stem the advance.

Exports make up 20% of the 12-nation euro economy, compared with 9.3% for the US economy and 12% of Japan’s economy, according to figures from the ECB. Demand from abroad allowed the euro region to grow 0.4% in the third quarter as consumer spending stagnated. ECB president Jean-Claude Trichet, who took over from Wim Duisenberg at the start of November, has so far declined to comment on the currency’s ascent, saying that the central bank favours a “strong and stable euro”.

He will probably face questions on the euro’s rise when he meets reporters in Frankfurt on January 8. The euro has risen 4.2% against the dollar since the last rate meeting on December 4.

“If we get up to $1.30, we will start to see some verbal intervention from the ECB,’ said Nick Matthews, a European economist at Barclays Capital in London.

Members of the 18-person rate-setting council, who represent the 12 national central banks, have already indicated they are concerned about the effect of the euro’s gains on growth.

ECB policy makers Quaden of Belgium and Wellink of the Netherlands have said a further increase may pose a “risk” to growth.