Paulson Defends Dollar's Status as Trichet, Flaherty Decry Drop

Nov. 10 -- U.S. Treasury Secretary Henry Paulson defended the U.S. dollar's status as the world's main currency after European Central Bank President Jean-Claude Trichet and Canadian Finance Minister Jim Flaherty decried its slide.

With the dollar reaching record lows this week against the euro and Canadian dollar, Trichet called ``brutal'' shifts in exchange rates unwelcome, and Flaherty said he's ``concerned.'' Yesterday, Paulson broke new ground in saying ``there's a reason'' the U.S. dollar has been the world's reserve currency for decades.

``There was a clear change in policy maker rhetoric this week,'' said Rebecca Patterson, a currency strategist at JPMorgan Chase & Co. in New York.

Protests may escalate as European finance ministers convene in Brussels and the Group of 20 meets near Cape Town next week. Without a greater shift from Paulson, who has repeatedly endorsed a ``strong'' currency while hailing the stimulus to American growth from exports, the dollar is unlikely to react, analysts said.

Paulson reiterated yesterday that a ``strong dollar is in our nation's interest'' and that markets are the best judge of currency values, during an unscheduled session with reporters. At the same time, he fleshed out his standard statement to reject suggestions that the dollar's international standing is under threat.

``The dollar has been the world's reserve currency since World War II and there's a reason,'' he said. ``I put the U.S. economy up against any in the world in terms of competitiveness.''

China's Reserves

The dollar's standing as the principle holding of central banks was undermined after Xu Jian, a vice director of the People's Bank of China, said this week the dollar is ``losing its status as the world currency.'' China has the world's largest foreign-exchange reserves, totaling $1.4 trillion.

``There's a question in the market about reserve diversification,'' said Marc Chandler, head of currency strategy at Brown Brothers Harriman in New York. ``Paulson is trying to remind people that the dollar has a history and that he thinks its role is secure.''

Still, Paulson's comments don't match the shift in communication of former Treasury Secretary Robert Rubin, when he softened the ``strong-dollar'' policy in 1997.

Trichet on Nov. 8 revived language he last used during the euro's 2004 rally. The currency's moves ``were undoubtedly sharp and abrupt,'' he said.

Hours later, Flaherty said exchange rates are having a ``serious effect on Canada.'' Government figures yesterday showed Canada's trade surplus narrowed to the smallest since 1998 as exports slumped.

Decline Accelerates

The dollar has stoked American exports amid the worst housing recession since 1991 and threats to consumer spending. The trade deficit unexpectedly narrowed to the smallest since May 2005 in September, the Commerce Department said yesterday.

Adam Cole, head of currency strategy at RBC Capital Markets in London, said officials are unlikely to intervene in the market and buy dollars because its decline hasn't yet become ``disorderly.''

``The market will still assume it has the green light to sell dollars,'' said Cole, who noted the U.S. currency kept falling against the euro even after Trichet's comments.

The weakening dollar does pose risks for the U.S., adding to inflation pressures at a time when the Federal Reserve has been lowering interest rates to safeguard economic growth.

Bernanke Optimistic

``We're going to make sure that the inflationary impact that may come from the weakening dollar is not passed into broader prices,'' Fed Chairman Ben S. Bernanke said at a congressional hearing two days ago.

He added that he was optimistic there will be ``a sound dollar in the medium term.''

The rhetoric from Trichet and Flaherty is a change from when Group of Seven finance ministers and central bankers met Oct. 19 in Washington and repeated past language on currencies in their statement. ``Disorderly movements in exchange rates are undesirable,'' they said, without mentioning the dollar.

Officials altered their language after the dollar's dive accelerated, increasing concern about the outlook for the global economy as the U.S. slows and the cost of credit rises.

``The Canadians and the Europeans will push increasingly for a clear U.S. stance on these issues, especially since there is evidence that the price action has now started to have increasing momentum,'' said Jens Nordvig, a currency strategist at Goldman Sachs Group Inc. based in New York.

Sarkozy Speaks

French President Nicholas Sarkozy told American lawmakers Nov. 7 the U.S. must support the dollar or risk triggering a trade war. Canadian Prime Minister Stephen Harper said the same day the Canadian currency's climb has been rapid and unprecedented ``by any standard.''

The G-7 hasn't intervened to buy or sell currencies as a group since September 2000, when it came to the rescue of a weakening euro.

``It may take coordinated interventions to halt the current slide in the dollar,'' though ``the G-7 aren't yet likely to be in a position to consider this,'' said Stephen Jen, head of currency research in London at Morgan Stanley. He predicts the euro will reach $1.51 by year-end from $1.4678 late yesterday, the highest close since its 1999 introduction.