Snow Likes His Strong Dollar Weaker
Dan Ackman, 11.15.04, 9:55 AM ET

NEW YORK - Once a year or so we like to check in on the dollar to find out if it is strong. Inevitably it is, but it is strong in different ways each time.

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Four years ago we had a strong dollar that bought about 1.19 euros. Two years later, by mid-2002--around the time that former Treasury Secretary Paul O'Neill, who was later fired, was wondering publicly about the strong dollar policy--the dollar was still strong, and it could buy .91 euros. Today, a dollar buys about .78 euros. Technically, the dollar is "weaker" than is has been in recent years. Officially, though, and as a matter of policy, the dollar is still strong.

Today in Dublin, O'Neill's successor John Snow said, "Our policy on the dollar is well known. We support a strong dollar. A strong dollar is in America's interest." That was the second thing Snow said, according to reporters traveling with him on his European tour. The first thing he said was "I've had a tradition of never commenting on the relative exchange value of the dollar." The second comment seems, in a general way, to contradict the first comment. Next he said currency values should be set in open markets: "Markets are driven by fundamentals...and fundamentals are best determined by the operation of open, competitive markets," he said on Monday.

These are Snow's first remarks on the currency since George W. Bush was re-elected president on Nov. 2. In his statements he essentially repeated what he has said ever since coming into office in January 2003. He is also essentially repeating remarks made by O'Neill, and by President Bill Clinton's Treasury secretaries Robert Rubin, now chairman of the executive committee at Citigroup (nyse: C - news - people ), and Lawrence Summers and by Lloyd Bentsen, Clinton's first Treasury Secretary, before that.

While the policy never changes--at least in rhetoric--the value of the dollar against major currencies certainly has. In the last week, the euro hit an all-time high of $1.30 (meaning a dollar bought just 0.77 euros, 35% less than four years ago).

It all seems a tad confusing, but specialists have no trouble deciphering Snow's meaning.

"[The strong dollar policy] is an implicit compact with the market not to say anything unpredictable," says Daniel Katzive, an economist who specializes in foreign exchange strategies at UBS (nyse: UBS - news - people ) in Stamford, Conn. Whenever the dollar weakens, as it has been, Snow "will always say 'strong dollar' because to say anything else would be dangerous."

While the dollar--though forever strong--has been falling, the U.S. trade deficit has continued to get worse. The difference between U.S. exports and imports grew from $380 billion in 2000 to $519 billion in 2003. More remarkable, in recent years, the value of U.S. exports, adjusted for inflation, actually declined, though that trend has reversed itself in recent quarters. (See: "So Long, Don Evans.")

This is a big problem for U.S. manufacturers, and the National Association of Manufacturers is one group that has objected to U.S. dollar policy, saying it has reduced America's international competitiveness and its share of world exports. While the U.S. currency has declined against the euro and, to a lesser extent, the Japanese yen, it has declined much less compared to other Asian currencies, notably China's, which tend to be more "managed." (Some leading exporters like Boeing (nyse: BA - news - people ), Caterpillar (nyse: CAT - news - people ) and Microsoft (nasdaq: MSFT - news - people ) have seen their fortunes rise recently, but the share prices of other top multinationals like Coca Cola (nyse: KO - news - people ) and IBM (nyse: IBM - news - people ) have declined.)

The trade deficit has continued to expand even as the dollar weakened. "The sensitivity of the trade deficit to currency movements is very weak," Katzive says. Though owing to the large and growing deficit, most economists, including UBS, expect the dollar's slide to continue. Thus the strong dollar will be weaker, and Snow will like it just fine.