What does the U.S. mean when it says it 'supports a strong dollar' ?


Investors have probably heard Obama administration officials, like previous Bush administration officials –- and just about every other administration since 1981 -- rattle off the mantra, 'The United States is committed to a strong dollar' even as the dollar continues to weaken. What's going on here?

Well, first: the currency market, long-term, emphasizes actions, not words, and current U.S. public policies do not support the dollar. To strengthen it, the U.S. must cut its trade deficit, eliminate the budget deficit, and get the U.S. economy growing at an adequate rate again.


Second, when a current (or previous) administration official has voiced commitment to 'a strong dollar' – that's not what they mean, or what they've signaled to Wall Street.

What they mean is, or the way institutional investors interpret it is, 'There will be no actions or sudden policy changes that result in volatile moves in the dollar, higher or lower.' In other words, the 'strong dollar' commitment is code language that the U.S. will let the dollar weaken (or strengthen) slowly, according to market forces, as determined by fundamentals. The dollar has weakened about 80% versus the euro since 2000.

And right now, those fundamentals are dollar-bearish. To be sure, some progress has been made to decrease the U.S. trade deficit (the recession has reduced U.S. consumption of foreign goods, even as the weaker dollar as boosted U.S. exports). But much more work needs to be done by Congress to cut the U.S. budget deficit, and to ensure that the U.S. economy has sufficient demand to grow at an adequate rate.

Monetary policy also, obviously, influences the dollar's value: if real (inflation adjusted) U.S. interest rates rise above real rates on other, major currencies, that too, would support the dollar.

When those four factors line-up in favor of the U.S. (trade surplus, balanced budget, robust GDP growth, real yield), the dollar will strengthen versus the world's other, major currencies.

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Last updated: February 13, 2012: 06:10 AM

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