Word: dollarization
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...Bush and Paulson keep saying they're in favor of a strong dollar? Well, the last time a top U.S. official tried to talk halfway honestly about what kind of currency we wanted--then Treasury Secretary Paul O'Neill in 2001--he spooked markets and was criticized mercilessly...
...strong-dollar mantra was originated by O'Neill predecessor Robert Rubin in the mid-1990s precisely to avoid such confusion. "It was boring, it was dull, it was repetitive, it was nonintellectual, and it worked like a charm," is how Alan Greenspan once described it when he was Fed chairman. "By not varying the statement, an issue never arose about whether a comment involved a subtle change or not in the policy toward the dollar...
...there hasn't really been a significant change in dollar policy post-Rubin. In the 1970s and '80s, the Treasury Department was constantly buying or selling foreign currencies to push the dollar this way or that. Since 1995, when Rubin took office, Treasury has made only a couple of token moves and since 2000 hasn't intervened at all. World currency markets are so huge and active, the thinking goes, that trying to manipulate the dollar is largely futile...
Which brings us back to a basic question: How strong a dollar do we actually want? Over time, a currency's value reflects an economy's fundamentals--how well a country allocates resources, how productive its workers are, how it contains inflation, etc. So in that sense, a strong currency is reflective of a strong economy. It's something any country would want...
When your currency is in the declining part of the cycle, as the dollar has been since 2002, that puts upward pressure on inflation, spooks investors and generally leaves people feeling cranky. It eventually gives an important boost to the economy by stimulating exports, but that takes years. During an upswing, by contrast, everything feels good. But it's the downswing that makes the upswing possible...