Bush Counting On Weak Dollar To Assure Re-Election

by Franz Schurmann

As Bush is now maneuvering to get into his re-election campaign, he has three aims. First, pull the American and global economies out of recession. Second, bring peace and prosperity to the Middle East, with substantial American corporate profits. Third, create enough grateful voters to re-elect him in November 2004. Bush hopes the weak dollar will help him accomplish all three.

A week before the Deauville meeting, Bush put forth an optimistic vision about the formation of a Middle Eastern free trade organization encompassing 23 states in the region, plus America. And a vast reconstruction program in Iraq is about to begin, headed by huge American corporations, notably Bechtel. On May 28, Bush signed a $350 billion tax bill that offers tax cuts to families, businesses and investors.

Le Monde's Eric Leser explains how the weak dollar operates. It benefits both U.S. producers and big multinational corporations. The former find their products once again competitive on world markets. At the same time, the latter rake up profits denominated in upwardly revalued currencies, mainly euros. And when they repatriate their billions of euros back home, the weak dollar automatically bestows a huge bonus on their profits. Leser points out that one quarter of the composite profits of Fortune magazine's "500 top firms" now come from overseas.

Leser gives a brief history of the euro that shows how big currency swings can lead to huge windfalls of money. When, on Jan. 4, 1999, the euro was first floated on markets, it cost almost US$1.17 to buy one. However, last year you could buy one euro for $0.83. Later, in 2002, the dollar-euro trajectory started reversing itself, and now analysts are predicting that soon enough, one euro could hit US$1.30 or more.

To understand why the once-strong dollar suddenly became the weak dollar, one has to go back to 1922. Then, the British pound and the American dollar were by far the strongest currencies in the world. Strength was measured by a stable exchange rate with gold. And gold held a stature akin to God in Heaven. But in 1931, Britain unilaterally abandoned the gold standard and financial chaos broke out worldwide.

In 1944, when Allied victory in World War II seemed assured, America and a downsized Britain agreed that in fact only one strong currency existed, namely the American dollar. That was self-evident, because over 90 percent of the gold above the earth's surface was in America's Fort Knox, put there by many nations caught in the chaos of WWII. Foreign nations buying or selling gold did so at an unchanging price of $35 for one troy ounce of gold.

Then President Nixon, on August 15, 1971, cut the dollar loose from gold, with both values independently determined by market forces. By the mid-'90s it was clear there were only four strong global currencies. Three of them were kings: the Japanese yen, the German mark (from which the euro evolved) and the British pound. The fourth was the American dollar, an emperor above the kings.

Why then has the dollar gone from strength to weakness? From 1922 until recently, the dollar was first and foremost a "safe haven." When Bush invaded Iraq it lost global trust and investors worried about Bush's bellicosity started flocking to the euro.

But John Snow doesn't think the dollar is weak, and President Bush has told Japanese Prime Minister Koizumi that he still supports a "strong dollar." It seems an oxymoron that American leaders talk about its strength even as the dollar is weak on the currency market.

In a press conference, Snow said that market value is not the only judge of a currency's strength. What in effect Snow is saying is that America is the only empire in the world. Trust it or fear it, no country can ignore it, and that includes ignoring the dollar.

The dollar has many functions. It has to be a good means of exchange and an investment that people want to hold on to and one that correctly reflects supply and demand in currency markets.

Two Asian giants confirm Snow's remarks. The Chinese yuan (or RMB) has been pegged to the dollar for several years and shows no sign of bolting to the euro. The Indian rupee's dollar value has not only remained much the same but investors are seeking rather than chucking their dollars.

Like it or not, signs are that the dollar will remain the emperor of the currencies. And that bodes well for Bush's ambitious visions.