Can the administration control the dollar?

By Felix Salmon
April 5, 2009

On the Brian Lehrer show Friday, I talked about the G20 meeting and the way that the US is taking a more mulilateral, as opposed to unilateral, approach to global leadership. What I didn’t mention is another huge difference between the beginning of the Obama administration and the end of the Bush administration: the strong dollar. Which is something exercising Andy Harless:

That old mantra, “A strong dollar is in our national interest,” still echoes through the air in the District of Columbia. Never mind that the strong dollar was largely responsible for the housing boom that led to the current bust. It was: the strong dollar encouraged Americans to buy from abroad and discouraged those abroad from buying from the US; as a result, the only way the Fed could induce a recovery was by cutting interest rates to levels that sparked a boom in housing. The rest, unfortunately, is history.

A strong dollar is not in our national interest. It is not in the world’s interest. It is not in the interest of justice. It is just wrong.

I disagree. I think that the strong dollar is very much in the national interest when we’re running trillion-dollar deficits: that flow of money into the country is helping to make the cost of that money a great deal lower than, by rights, it should be. Which in turn is saving the US taxpayer tens if not hundreds of billions of dollars.

And clearly a strong dollar is in the world’s interest: we’re still the consumer of last resort, and if the dollar weakened substantially, we’d import even less than we’re importing right now — which would benefit no one.

But more to the point, this whole debate is stunningly academic. The FX markets love to believe that the Treasury secretary has real control over the level of the dollar, but he doesn’t. If we wanted a weaker dollar, what would we do? Cut interest rates? We’ve done that already, and we’ve hit the zero bound, so that’s not an option. Simply print money? Well, we’re trying that too. In effect, US monetary policy is trying its hardest to send the dollar south, and is failing miserably.

So long as the generalized global level of fear remains high, the flight-to-quality trade will remain, and like it or not, when the whole world is falling apart, the US dollar tends to look like the least worst option. Sooner or later, I suspect it’s going to weaken, as a few bold hedge funds rediscover the carry trade, and as the Fed’s monetary policy starts to show up in the inflation figures. But I’m not holding my breath.


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There is no way to control or to have a significative influence in the exchange rate. Just think that the exchange is the price of the dollar in terms of Euros, Yens, Pounds, and the hundreds of world currencies. Regarding “strong dollar”, keep in mind that strong is a relative term. Inflation and many other variables influence in this concept, which is essentially dynamic. In the short term, 1.3 against the Euro is neutral. Soon it will go back to 1.6, which is very good, a little weak dollar.

A strong Dollar is required to keep pace on inflation
and trust in the USA system – the housing boom correlating to a period of strong US dollar is contradicted:
The boom period occured in a week dollar scenario against the euro and the chinese and the russian currencies – once trust is not maintained the
bond prises will fall and interest rates will rise relecting a infationary scenario

A strong dollar is not in our interest. A week dollar is not in our interest. It is not in our interest to even try to control the dollar. It should be, will be, what the globe determines it should be, no more, no less. Attempts to control it will simply give us China’s problems. Let them have theirs. And no, it wasn’t the strong dollar that gave us the housing crisis, it was bad lending pure and simple. Bad lending may have served to keep the dollar overvalued by promising returns that could not be met, but bad lending was the problem. Even if only good lending was pursued the dollar would not necessarily have been that much lower.

Posted by Lord | Report as abusive

Dollar does not count by strength but needs “Trade” to be measured and as such there seems to be no control valve for this cheap flow.Exports in trade volume of reasonable prices will decrease recession and depression and increase employment.After every storm requires times to settle and not the stimulus packages,printing dollars or bailout which will further create more poverty for the next generation.

Posted by Peter Vaz | Report as abusive

Having the world’s most trusted reserve currency is a blessing in the same way having large reserves of oil or diamonds is a blessing to an emerging nation. The elites get fabulously wealthy, everyone else stays poor and oppressed. Democracy is subverted at every turn by the oligarchy that controls the most precious national resource.

Posted by Brian | Report as abusive