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May 23, 2011

Dollar naivete

A remarkably naive note, A Strong Dollar Isn’t Always a Good Thing - Economic View - NYTimes.com

AT a recent news conference, Ben S. Bernanke, the Federal Reserve chairman, was asked about the falling dollar. He parried the question, saying that the Treasury secretary was the government’s spokesman on the exchange rate — and, of course, that the United States favors a strong dollar.

Listening to that statement, I flashed back to one of my first experiences as an adviser to Barack Obama. In November 2008, I was sharing a cab in Chicago with Larry Summers, the former Treasury secretary and a fellow economic adviser to the president-elect. To help prepare me for the interviews and the hearings to come, Larry graciously asked me questions and critiqued my answers.

When he asked about the exchange rate for the dollar, I began: “The exchange rate is a price much like any other price, and is determined by market forces.”

“Wrong!” Larry boomed. “The exchange rate is the purview of the Treasury. The United States is in favor of a strong dollar.”

For the record, my initial answer was much more reasonable. Our exchange rate is just a price — the price of the dollar in terms of other currencies. It is not controlled by anyone. And a high price for the dollar, which is what we mean by a strong dollar, is not always desirable.

Come now, I think the whole world understands the USGov's Kabuki theatre regarding the dollar. Say that they're in favour of a strong dollar, but take no such action. the reason it is not stated straight out is of course that would be interpreted as a signal of active devaluation, which could launch some major unruliness in the markets, particularly chez sovereign buyers.

Posted by The Lounsbury at May 23, 2011 10:29 AM
Filed Under: Biz - Policy & Development , Biz - Private in MENA

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