WASHINGTON, Feb. 27 (UPI) -- German Chancellor Gerard Schroeder's remark Thursday that the EU may cut interest rates to counter a weak dollar is generating great interest. But it hardly mattered that Schroeder and President Bush barely discussed the issue during a Washington press conference Friday, because the economic tea leaves show the future pretty clearly: Bush will continue to let the market control the dollar, and the European Central Bank (ECB) will make the interest cut.
Bush reaffirmed the official U.S. strong dollar policy to Schroeder Friday
, the second day of a three-day visit to the United States. It is only the second U.S. visit for Schroeder since Bush has been in office
, after bitter disagreement between the two leaders over the Iraq war. But the dollar's weakness could drive yet another wedge between them, especially with the strong trade ties the countries share.
The euro rose yet again Friday closing at almost $1.25
, up from just over $1.24 Thursday. The euro rose by 15 percent in the last 12 months against the U.S. dollar, and more than 50 percent against the dollar from its all-time low of 82 cents about four years ago. The euro reached an all-time high Feb. 18
, topping $1.29.
There has been much speculation that the ECB may cut interest rates at its monetary policy meeting next Thursday to weaken the euro. Concern is that, otherwise, exports to the U.S. will be diminished because of the strong euro driving prices up. And, currently, the ECB's interest rate is 2 percent, 1 above above the U.S. rate. And Friday, EU statistical agency Eurostat reported that consumer prices fell 0.2 percent during January from December, also, inflation is expected to slow further in February, which further boosts the possibility of an ECB rate cut.
Despite the avowed strong dollar policy, the administration has actually let the market control the dollar's value thus sending it down.
However, many analysts have said that there was never a strong-dollar policy earlier during the Clinton administration other than to say there was a policy, and Treasury Secretary John Snow has simply carried on that tradition. But the dollar really was strong during Clinton-era Robert Rubin's tenure, and hasn't been during Snow's. Rather like crying wolf, just saying that a strong U.S. dollar policy exists hasn't seemed to convince wary foreign investors who aren't buying U.S. dollars like they used to.
During a speech Thursday at the Chicago Council on Foreign Relations, Schroeder said that the weak dollar is dangerous for world trade.
"Major imbalances in the global economy and fluctuations in exchange rates give us cause for serious concerns," he said.
"Europe's current account is virtually balanced. Savings and capital investments remain largely in balance in our countries. Against this backdrop, further significant shifts in the exchange rates that would put the eurozone at a disadvantage do not make sense economically. Rather, they would do harm," he said.
While a weak dollar helps to drive U.S. exports and narrow the trade deficit, it hurts export-driven European economies such as Germany
, which last year had $750 billion in exports. Most analysts agree that the ECB will probably decide to cut interest rates rather than buy dollars. And Bush can hardly be expected to ask Greenspan to raise interest rates to strengthen the dollar just before the election.
As an added measure to slow the sale of U.S. goods into the EU, the EU confirmed Friday that it would impose tariffs on U.S. goods starting March 1. Schroeder would seem to be at odds with this decision, having said Thursday in Chicago, "The answer cannot be that we rely on protectionism or attempt to shut ourselves off from the global markets when they have unpleasant consequences for us."
The EU is imposing the tariffs based on a World Trade Organization ruling in 2002 that a U.S. law awarding big exporters reductions on export taxes was illegal. It authorized the EU to impose tariffs on up to $4 billion worth of U.S. goods. The tariffs will increase each month, starting at $16.5 million in March
, and rising to $46.4 million by December.
While U.S. exporters might not take the news so hard with the dollar weak as it is, the tariffs would become a major problem if the dollar gained strength, driving up the cost of U.S. exports.
Thursday, French Prime Minister Jean-Pierre Raffarin joined Schroeder in calling for the European Central Bank to reduce interest rates, while the Australian dollar fell slightly in reaction to the dollar-euro tussle.
On Thursday
, Schroeder said "I would just say that I believe the European Central Bank has recognized that this relationship between the euro and the dollar is not helping the export sector, to put it very mildly," in an interview with the Financial Times.
"I can imagine that as a result, with all due respect for the independence of the ECB
, there will be some consideration about whether (eurozone) interest rates are at the right level
," he added.
