GOODBYE, STRONG DOLLAR: Looks like

GOODBYE, STRONG DOLLAR: Looks like the Bush administration has decided on one strategy for jump-starting the economy — kissing the strong dollar goodbye. From today’s Chicago Tribune:

While professing to favor a strong dollar, the administration is sending an unmistakable signal that it would not resist if the dollar continued to weaken in world financial markets. A less-valuable dollar stimulates the economy through price changes. American exports become cheaper, and foreign imports become more expensive. That should boost sales of U.S.-made products here and abroad, putting more Americans back to work. This “benign neglect” dollar policy, as many analysts call it, holds some promise. U.S. firms are beginning to see benefits from the greenback’s yearlong decline against the European euro and the Japanese yen…. The new dollar policy is being pursued quietly amid the administration’s frustration with an economic recovery so anemic that not a single net new job has been created since the 2001 recession ended.

Then there’s this from Reuters:

“People are waking up finally to the reality that the game has changed. The slurry of comments from [Treasury Secretary] John Snow today are going to be remembered as the moment when the mythology of strong Bush administration support for the Rubin-era strong dollar policy finally fell away,” said Andrew Weiss, a strategist at AIG Trading Group in Greenwich, Conn. Snow has been in the currency spotlight for a few days now, after he alluded to the benefits a weaker dollar have had on the U.S. export sector. While highlighting the benefit a weak dollar has on exports, Snow cast doubt on the benefits of currency intervention.

I have decidedly mixed feelings about this strategy. There is some logic to it. Letting the dollar slide simultaneously increases aggregate demand in the economy, as our exports are cheaper and Americans substitute away from more expensive imports). This move simultaneously helps to alleviate the Fed’s fears of deflation, as a devaluation raises the price level of imports. In terms of foreign economic policy, however, this is a dangerous game that’s being played. There was nothing in the last G-7 statement to indicate that this slide in the dollar is being coordinated with our major trading partners. Without multilateral coordination, this move smacks of beggar-thy-neighbor — and our neighbors are Canada, Japan and the European Union, none of which is a real engine for growth right now. Japan does not want the yen to appreciate too much, and let’s just say I don’t see the EU willing to absorb costs to get the American economy moving again. It will be very interesting to see how the rest of the G-7 reacts to this. Developing….