Talk The Dollar Up Not Down

Treasury Secretary Nicholas F. Brady has never made any secret of his disregard for the dollar's strength in the foreign exchange markets. A falling dollar makes U.S. goods cheaper abroad, and as Brady sees it, the resulting boost to America's exports provides a welcome lift for growth. So when the dollar came under attack in the foreign exchange markets in early July, the Treasury Secretary, true to form, went on TV to say he wasn't concerned.

But the world economy is now at a point at which Brady needs to care about the dollar's strength. The greenback has fallen 2.7% against the German mark since early July, and the Federal Reserve and other central banks have spent billions to keep it from falling further.

The central bankers recognize what Brady ignores: The costs of a falling dollar now exceed the benefits. A weak dollar drives foreigners from the markets where the U.S. Treasury must sell its trillions in notes and bonds. It brings inflation. It undermines the dollar's status as the world's leading reserve currency, damaging America in a world where oil and many other commodities are priced in dollars and hence immune from currency fluctuations. And in free-fall, a plunging dollar could force the Fed to push up interest rates--with disastrous consequences for the recovery that Brady and President Bush are so desperately seeking.

It's time for Brady to recognize the dangers of his dollar-damaging talk. The not-so-almighty dollar's fundamentals aren't strong right now: Short-term interest rates are more attractive in Europe than in the U.S., and hopes of post-election fiscal sobriety in Washington grow dimmer by the day. With such conditions, the U.S. can't afford to let the dollar sink unimpeded, never mind talk it down. The buck needs a booster in the U.S. Treasury--even in an election year.

Before it's here, it's on the Bloomberg Terminal.