US President George W. Bush's foreign policy is simple: don't mess with America. The same, it appears, applies to economic policy. Last Friday, the dollar fell sharply against the euro. That was unsurprising, since the downward lurch followed comments from US Federal Reserve Chairman Alan Greenspan which -- by his own cryptic standards -- were unambiguous.
"It seems persuasive that, given the size of the US current account deficit, a diminished appetite for adding to dollar balances must occur at some point," Greenspan said.
This was hardly a novel statement for the Fed chairman but the timing was interesting. It came on the eve of a meeting of the G20 -- a conclave of developed and developing nations -- in Berlin at which the recent fall in the dollar was a hot topic.
Moreover, it came three days after US Treasury Secretary John Snow poured cold water on the idea that the world's central banks might get together to arrest the dollar's fall. The history of "efforts to impose non-market valuations on currencies is at best unrewarding and checkered," he said in London.
Europe got the message. Eurozone policymakers are growing increasingly alarmed about the fall in the value of the dollar, since it threatens to choke off exports -- the one area of growth in the 12-nation single currency zone. They would like nothing more than to wade into the foreign exchanges in concert with the Fed and the central banks of Asia to put a floor under the greenback, but they know that Washington has no interest in such a move.
Joaquin Almunia, Europe's monetary affairs commissioner, said last week: "The more the euro rises, the more voices will start asking for intervention. It has to be a coordinated effort, but it seems that our friends across the Atlantic aren't interested."
That sums things up rather nicely. There are two reasons why the Bush administration is not willing to play ball with the Europeans.
The first is that it sees a lower dollar as inevitable, given that the US current account deficit is running at $50 billion-plus a month. A lower dollar makes US exports cheaper and imports dearer.
According to this interpretation, the Americans are now simply bowing to the inevitable. Stephen Lewis, of Monument Securities, says the markets have finally lost patience with the laxity of Washington towards the twin trade and budget deficits, pumped up by cheap money and tax cuts.
"The truth is that the US fiscal and monetary excesses, which have been essential to keeping the global economy afloat in recent years, are no longer tolerated in the foreign exchange markets," he said. "The status quo is not an option. The only question is how the pain of adjustment will be apportioned."
The second reason is that the Bush administration has neither forgotten nor forgiven France and Germany for the stance they adopted over Iraq. French President Jacques Chirac and German Chancellor Gerhard Schroder weren't interested in helping the US to topple former Iraqi president Saddam Hussein, and now it's payback time. If the European economies are suffering as a result of the weak dollar, why should the US care? What's happening in the currency markets is simply American unilateralism in a different guise.
In the short term, therefore, the dollar looks like a one-way bet. City analysts are already talking about it hitting $1.35 against the euro, and given the tendency of financial markets to overshoot, nobody would be that surprised if it fell to $1.40 over the coming months. A smooth and steady decline -- which is what Snow is trying to finesse -- would do little damage to the US economy, but it would hit Europe hard.