President Clinton is an Oxford-educated policy wonk. Treasury Secretary Lloyd M. Bentsen is a consummate Washington insider. And Treasury Under Secretary Lawrence H. Summers is a respected international economist. But when it comes to managing dollar policy, they're mere babes in Bretton Woods.
Since February, Administration officials have engaged in a clumsy attempt to talk up the yen as a way to reduce Japan's trade surplus with the U. S. In the process, they have spread confusion among allied governmentsand ignited fears around the world of a full-blown dollar collapse.
"AMATEUR HOUR." Although the U. S. says it has no policy of driving the yen up and the dollar down, a pattern has recurred for months: One senior official after another suggests the yen is too cheap, driving foreign exchange markets into a frenzy of bidding up the yen's price. Then, the Administration retreats, denying that it wants to manipulate the dollar's value. "We are confused, and so is the market," gripes Tatsuya Terazawa, deputy director of the Americas Div. of the Ministry of International Trade & Industry. "I'm not sure the U. S. government has a clear policy."
Now, Washington's mixed signals are starting to have serious consequences. With the dollar hovering around a post-World War II low of 107 yen, a 14% drop since Clinton took office, the Federal Reserve is getting worried. With the Administration's blessing, the Fed intervened repeatedly in currency markets, starting in late May, to prop up the greenback. Foreign exchange experts now wonder whether the Administration is pursuing a misguided "strong yen" policy or just showing its inexperience. "It's a little like the Amateur Hour," complains a senior Fed official. "They don't understand the risks they are courting."
Those risks are substantial. The Administration is counting on a stronger yen to put a dent in Japan's $50 billion trade surplus with the U. S. Even if the strategy works, the benefit may be more than offset by the harm a weaker dollar can do to the economy. One big danger is inflation. As a stronger yen squeezes exporters' margins, prices of Japanese goods are rising. U. S. competitors traditionally respond by boosting their own prices. And a higher yen hurts Japan's exports to the rest of the world, slowing growth at a time when Clinton is pressing Tokyo to stimulate its economy.
But the Fed's biggest fear is that the dollar will also start a steep slide against other major currencies. After its late-May fall against the yen, for instance, the dollar fell 3% against the German mark, to 1.59. If traders begin dumping greenbacks across the board, the Fed would likely try to stem dollar flight by jacking up interest ratesthe last thing the Administration wants with the U.S. economy still struggling. "There has been a misunderstanding," Bentsen said in Paris on June 2. "We are not seeking an appreciation of the yen."
LOUDER THAN WORDS. Yet Washington's repeated assertions that it is not trying to manipulate exchange rates don't square with the Clintonites' actions (chart). Bentsen, a weathered U. S. political operator but a neophyte in international finance, was the first to create a stir when, on Feb. 19, he quipped: "I'd like to see a stronger yen." Fed Chairman Alan Greenspan was on the phone fast, gently lecturing the Treasury chief on the dangers of ad hoc dollar policy.
But Administration officials didn't get the message. On Apr. 16, at a news conference with Japanese Prime Minister Kiichi Miyazawa, Clinton himself declared that a stronger yen would help reduce the trade surplus. A week later, Commerce Secretary Ronald H. Brown said in Tokyo that Japan's economy was not able to cope with a higher yen.
Those statements helped drive the dollar to less than 110, prompting the Fed and Bank of Japan to intervene modestly by buying dollars on Apr. 27. Fed Vice-Chairman David W. Mullins Jr. suggested that every Administration official outside of Treasury, including the President, should adopt the mantra: "We don't discuss the dollar."
The Administration seemed to get the message until May 24, when Brown again talked about how a stronger yen could help reduce the Japanese trade surplus. He was quickly rebuked by Treasury officials. But the next day, Summers, who is Treasury's point man on international finance, also committed a faux pas by sending Congress an exchange rate report that repeated Brown's observation in passing. The dollar began sinkingthis time against an array of currencies. Summers admitted the dollar had fallen "too far, too fast," and the Fedjoined by the Bank of Japanintervened three times between May 27 and June 1 to stabilize the dollar at 107 yen. BUSINESS WEEK has learned that Treasury's near-term goal is now to keep the greenback above that level.
NOT BUYING. Treasury officials lament that traders have misinterpreted their statements. But market experts don't buy that, figuring the Administration is trying to beat Japan into trade concessions, using the dollar as a club. "It's like the girlfriend who keeps saying she only loves you, but every weekend you see her with another guy," observes Robert A. Brusca, chief economist at Nikko Securities Co. International. "What else are you supposed to think?"
European finance ministers aren't particularly upset with the dollar flip-flops, because the dollar so far hasn't fluctuated dramatically against their currencies. They also reckon that a stronger yen just might help reduce Japan's trade surplus with the European Community. But the Europeans concede that things look confusing across the Atlantic. "It's very difficult to figure out what the Administration's dollar policy really is," says a senior EC official.
If the Administration really wants a stronger yen, its best policy might be to let the markets work their will. Traders say that tempting yields on Japanese government bonds and a balance of payments surplus pushing $140 billion are enough to drive up demand for yen.
For its part, the Administration claims it finally has learned that lesson. "Comments on dollar policy are unwise," says Bentsen's deputy, Roger C. Altman. Now, the Clintonites just have to prove they can heed their own advice.