January 22, 2011
An article that discussed President Obama’s public campaign to boost exports told readers that the federal government “has little control” over the value of the dollar. This is not true. The Treasury and Fed could set out to lower the value of the dollar if they opted to do so. This could mean selling dollars in international money markets and buying other countries’ currencies. They could even opt to peg the value of the dollar against other countries currencies, as China has done with the dollar.
In the Clinton years, Robert Rubin had a policy of pushing up the value of the dollar. He put muscle behind this effort through the U.S. control of the IMF at the time of the East Asian financial crisis. The conditions that the IMF imposed were so onerous that developing countries decided that they needed to accumulate massive amounts of reserves in order to avoid being put in a similar situation. This meant accumulating large amounts of dollars. They did this by keeping down the value of their currencies against the dollar (i.e. raising the value of the dollar).
It is very misleading to assert that the value of the dollar is outside of the government’s control. President Obama, like his predecessors, has allowed the dollar to remain over-valued. An over-valued dollar effectively subsidizes imports and imposes a tariff on exports. There is nothing that President Obama’s new competitiveness panel can realistically hope to do that would come close to offsetting the competitive disadvantage created by an over-valued dollar.
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