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Economic Forum: Dollar hasn't hit bottom yet
Bush administration draws criticism for allowing currency to decline
By Christopher Noble, Market Watch
Last Update: 11:49 AM ET Jan. 30, 2005
DAVOS, Switzerland (Market Watch) -- Look out below.
That appeared to be the consensus about the U.S. dollar's future among many of the participants leaving this small Alpine ski resort at the end of the World Economic Forum's annual meeting.
U.S. corporate leaders, academics and some policy makers warned of further declines for the battered greenback, though none predicted a sudden, uncontrolled fall that could lead to a currency crisis and recession.
"The U.S. dollar is no longer a stable currency, it's devaluing all the time," said Fan Gang, Director of China's National Economic Research Institute, China Reform Foundation.
The expectation that the dollar will fall more was likely to be a source of tension at the meeting in London this week between the United States and its chief economic partners in the Group of Seven (G7) rich countries.
G7 members including Britain, France and Germany have sharply criticized Washington for not doing more to reverse the dollar's decline against the major currencies.
"The sharp moves upward of the euro were unwelcome," European Central Bank President Jean-Claude Trichet said on Saturday, adding that the dollar's weakness was "counterproductive on economic growth".
The mood surrounding the dollar was so bleak that U.S. Undersecretary of the Treasury for International Affairs John Taylor was moved to tell reporters that he saw no reason for a dollar crash.
"There is nothing in play here except some good, sensible policies ... so I see no reason for that," Taylor was quoted as saying by Reuters.
The twin budget and trade deficits, and the perception that the Bush administration is willing to tolerate a weaker dollar have helped undermine the currency, which has fallen steadily over the last three years. The drop has caused some to lose confidence in the dollar and raised fears that foreign investors, whose money is needed to finance the deficits, may slow their contributions.
Evidence of this loss of confidence was revealed in a survey of central bankers released last week, which showed that many had cut their level of dollar reserves in favor of euros over the last two years. The survey was carried out by Central Banking Publications.
Still more evidence of the lack of confidence in the dollar came from Bill Gates, chairman of Microsoft Corp. and the world's richest man, who said on Friday night he was betting the dollar would fall more.
"I'm short the dollar," Gates said in an interview held in front of an audience of about 200. "The old dollar, it's going to go down."
Deficits weigh
A narrowing of the trade gap is seen by many as a crucial step to restoring confidence in the dollar and helping it reverse at least some of its recent declines.
Taylor and U.S. Trade Representative Robert Zoellick sought to reassure participants that the United States wanted to cut the gap, adding that the international community should help by boosting growth in their own economies. They also repeated calls for China to let its currency rise against the dollar, which would be another way to cut the trade deficit.
But on the second front at least, Washington got some bad news on Saturday.
Huang Ju, executive vice-premier of China, said Beijing needed to reform its banking sector and work on opening its markets before it changed its current policy of pegging the yuan to the dollar at a fixed rate.
"We have no specific timetable" to change foreign exchange policy, Huang told the conference.
The comment was a blow to Western countries, which for over a year have been putting pressure on Beijing to revalue its currency and had hoped that progress could be made at the G7 meeting that begins Friday in London.
The other way the United States could help the dollar would be to cut its budget deficit, which would help restore confidence in the solidity of the currency.
The Bush administration has pledged to halve the deficit over the next four years, but with an expensive agenda of tax and social security reforms and the war in Iraq it is not clear they can live up to that promise.
Right now the budget shortfall is expected to hit $368 billion in 2005 after $412 billion last year. The 2005 forecast excludes about $100 billion in spending on the war in Iraq and fighting in Afghanistan.
Despite the expectations of more declines for the dollar, the foreign exchange markets appeared to take the developments in stride. The dollar was trading at about 1.304 euros on Sunday in Davos, compared to 1.3078 on Wednesday, when the meeting started.
And despite the public pronouncements on the dollar's future weakness, there was evidence that some major corporations were budgeting for a dollar that remained stable or declined only modestly.
For instance, Henning Kagermann, the chief executive of German software giant SAP, said his company was budgeting for a dollar at about 1.30 euros in 2005. And Maurice Levy, chief executive of international advertising leader Publicis, said his company budgeted for a dollar at 1.32 euros.
"Maybe that is a little bit pessimistic, maybe it is a bit optimistic, I don't know, but that is where we put it," Levy said.
Christopher Noble is a reporter for MarketWatch in San Francisco.
