Under President Reagan, the United States pulled the rug out from under the US dollar. But President Clinton's team supported a "strong" dollar policy. Now, President Bush's treasury secretary, John Snow, is talking about the need for "flexible" currencies - and the dollar is falling.
What's going on here?
Almost every administration wants to leave its imprint on the currency. It all depends on what the US economy is doing at the time. If the economy is lagging - as it is now - administrations want a weaker dollar to promote exports and create jobs. If the unemployment lines are short, treasury secretaries like a muscular dollar, which allows consumers to buy products from abroad for less money.
"This administration never said it was for a weak dollar, but they are clearly concerned about the lack of employment growth," says Paul Kasriel, an economist at Northern Trust Company in Chicago. "There is a lot of pressure from the manufacturing sector and labor."
That pressure is particularly strong with the Chinese currency, the yuan, which is pegged to the US dollar.
Many American companies are moving their manufacturing to China where the labor costs are only about 5 percent of the cost of labor in the US. As a result of this stampede, the US trade deficit with China is now running at $130 billion a year - a record for any country.
At the same time, the yuan has not been revalued since 1995, when the Chinese economy was much smaller and weaker compared to today. Business groups argue that the Chinese should raise the value of their currency by 30 to 40 percent compared to the dollar.
The Chinese have already rejected this concept.
"I think they are telling the truth," says Don Straszheim of Straszheim Global Advisors in Santa Monica, Calif. "I don't even think they will revalue next year."
Instead, he says the Chinese goal is to let their currency begin floating as their hosting of the 2008 Olympics gets closer. "They want to be known as a full-fledged member of the global economy, and a necessary condition of that is to have a freely floating currency."
Another reason the Chinese are reluctant to revalue, says Mr. Kasriel, is that their overall trade surplus with the rest of the world is narrowing. China has now become a major importer of raw materials and parts to assemble for goods shipped to the largest consuming nation - the US.
"This means countries like Chile - which are exporting copper to China - are starting to benefit from the Asian economies," says Kasriel. "And, the Chileans may want to buy something from the US which will help our exports."
Any help on the export front is welcome, since the US is now borrowing about $1.5 billion a day to finance its trade and budget deficits. Thus, there is also pressure to keep the dollar attractive because most of the lenders are foreign governments. As of 2002, foreigners owned 31.5 percent of US Treasury securities. And, of that ownership, 40 percent is held by Japan and China.
Since September 2002, the US dollar has declined about 30 percent compared to the euro and nearly 20 percent compared to the yen. This makes it more expensive for Americans traveling to Provence for a holiday or buying a new Lexus. However, it makes US corn and soybean exports more competitive and makes the US a more attractive place to visit for Europeans.
Some economists expect the US dollar to keep falling. Earlier this year, there were some estimates that the dollar would have to drop another 15 to 20 percent to further encourage US exports. David Wyss, chief economist at Standard and Poor's, thinks that prediction is still on track.
"We've had five years of an overvalued dollar, now we're headed towards an undervalued dollar," he says.
If the dollar does fall some more, the rate of change is important. A sharp drop could scare investors, particularly in the bond market. Some of this uncertainty is already reflected in the rising price of gold.
"If the fall is orderly, it is modestly beneficial to US manufacturers," says Mark Vitner, a senior economist at Wachovia Securities in Charlotte. But he warns there may be some "rough" days ahead for the greenback when the dollar falls sharply and bond market investors scramble for safety.
A moderate drop, on the other hand, should help take some pressure off US companies' bottom lines. They will be able to raise prices - something they have not been able to do for years. "This may mean we'll have higher inflation and higher interest rates," says Mr. Wyss.
Higher interest rates won't be good for the stock market. However, as Wyss quickly points out, corporate earnings might improve. This could raise equity valuations. And, inflation won't be a big problem, since inflation rates are at 40-year lows, he says.
In fact, many economists don't see the dollar as having long-term problems. The European economy is in worse shape than the US. And, it's still not clear if the Japanese recovery will last. "Fundamentally, dollar investments are not as good as they used to be, but they are still better than most others" says Wyss. Adds Mr. Vitner, "I think people are too bearish on the US economy."