The President says current conditions in Europe are causing the dollar’s recent slide.

WASHINGTON (AP) – President Bush repeated his support Monday for a “strong dollar” and blamed its recent slide on Europe’s higher interest rates.

Private economists say a far bigger factor in the greenback’s decline is America’s record trade deficit.

Bush indicated that he believed the dollar will strengthen now that the difference in interest rates between the United States and Europe was narrowing, but many private analysts forecast a continued fall – meaning that European products will cost more in the U.S. market and American tourists will find traveling in Europe more expensive.

Bush told reporters that he had spent time last week discussing the dollar’s recent decline with other world leaders at the Group of Eight nations summit in Evian, France.

“I reminded our G-8 partners that there is a difference in interest rates, particularly between Europe and the United States,” Bush said. “And that interest rate differential has caused people to sell dollars to buy euros to get higher return on investment. And that’s why you’re seeing pressure on the dollar.”

Bush said that he expected “different behavior” as the difference in interest rates between the United States and Europe begins to narrow.

Last Thursday, the European Central Bank, which sets interest rate policy for the 12 nations that share the euro as a common currency, slashed a key interest rate by a half-point to 2 percent, the lowest level since World War II.

The Federal Reserve, in a series of 12 rate cuts beginning in early 2001, has pushed the comparable U.S. interest rate down to a 41-year low of 1.25 percent. Many economists believe the Fed will cut the rate further to 1 percent or even lower when Fed policy-makers next meet on June 24-25.

“I repeat as clearly as I can: the policy of the United States government is a strong dollar policy,” Bush said in his brief comments to reporters .

Analysts believe the opposite: They think the administration wants the dollar to lower the trade deficit. A weaker dollar makes U.S. products more competitive on overseas markets and foreign goods more expensive for U.S. consumers.

“The dollar had gotten too strong and it was contributing to huge trade deficits,” said Sung Won Sohn, chief economist for Wells Fargo in Minneapolis.

Private economists say Bush’s latest comments are in the same vein as the subtle shift in policy signaled over the past month by Treasury Secretary John Snow: Policy-makers say they back a strong dollar, but couch their support with enough qualifications to convince currency traders that nothing will be done to halt the dollar’s slide.

The euro hit a record high against the dollar last week and over the past year the dollar has fallen by more than 20 percent against the euro.

Analysts said interest rates have played only a small part in the decline, and say the bigger reason is soaring trade deficits. The U.S. current account, the broadest measure of trade, hit an all-time high of $503.4 billion last year, up 28 percent from the 2001 deficit of $393.4 billion.

Many economists believe the current account trade deficit, which reflects not only trade in merchandise but also services and investment flows, will hit a new record of $568 billion this year, meaning the United States must attract more than $1 billion a day in new foreign investment to pay for the trade imbalance.

As long as the dollar’s decline is orderly and does not spark panic selling by foreign investors of U.S. stocks and bonds, the weaker dollar should lead to stronger U.S. economic growth by boosting the fortunes of American manufacturers, who have suffered three years of losses in manufacturing jobs.

David Wyss, chief economist at Standard & Poor’s in New York, predicted that the dollar will decline by another 7 percent before the end of this year, reflecting further increases in the trade deficit.

Presidential spokesman Air Fleischer said that Snow briefed Bush and the Cabinet on his expectations that the sluggish U.S. economy, which has been flirting with a new recession, will post significantly higher growth in the second half of this year.



On the Net:

Treasury Department: http://www.ustreas.gov/

AP-ES-06-09-03 1756EDT



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