The Fed already has cut interest rates aggressively and lawmakers seem too focused on international events to enact tax cuts anytime soon. Hence, the allure of a weaker dollar. It's a powerful policy tool that the White House isn't using.
Yet O'Neill knows the downside of admitting the dollar's value is inflated -- the financial equivalent of saying "Actually yes, you're really porking up, darling" -- is too great. What if investors fled US assets en masse, driving up bond yields, slamming stocks and making it harder for the US to finance its current account deficit? So he says: "I support a strong dollar policy. It's perfectly sized." The mere suggestion the US might abandon its strong currency policy sends shudders though Tokyo. Japanese officials have been working day and night for the last year to lower the yen's value versus the dollar. Now that the US has a valid reason to rethink its dollar policy, Tokyo is right to worry.
The dollar, after all, has been sliding of late and threatening to break below the Japanese yen 130 level. It was changing hands near Japanese yen 135 just a couple of months ago. If the US begins favoring a weaker dollar, the yen could zoom higher, complicating things for Japan.
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