HOW does one support the dollar?

Monk misundertands my view on the dollar. And he far overestimates the direct effect that Bush economic policies have had on the dollar.

My views on the dollar decline are clearly stated here, here and here.

To restate briefly the causes of the dollar decline are:
1. Variance in the economic cycle
2. Balance of trade
3. Overall market position (long dollars as a result of 2. and holding massive amounts of US assets)
4. The subprime crisis
5. Oil
6. Anti-Bush, anti-Americanism

If you look at items 1-6 it is clear that Bush economic policies cannot reasonably be blamed for weakness in the dollar. The administration cannot manage the economic cycle especially for China and the Eurozone. Nor can it directly manage the balance of trade. Certainly #3 is not an issue. #6 is the idiocy of the rest of the world but that's many other posts. If you want to lay blame indirectly you could blame Bush for not regulating the loan origination folks but I don't think that's the thrust of his argument. Oil is interesting and as I said previously it is both a cause and effect of the weak dollar. You could argue that the administration could have done/be doing more to suppress oil prices but again that's a direct post (forthcoming).

In short the secular decline of the dollar comes after a secular rally during the Clinton administration based on the explosive growth of the internet and related businesses.

I am shocked that David Malpass, chief economist of Bear Stearns, seems to think that President Bush (and even Hank Paulson) could effectively jawbone the dollar significantly higher. Maybe that is why he is chief economist at Bear Stearns (cheap shot :) Even intervention against the wind tends to be quite ineffective and will often draw speculation - see George Soros and the Bank of England.

In sum there isn't that much the Bush administration could have done and could do by itself at the moment.

The dollar at current levels is weaker than I like but not weaker than I expect. It's lost 5% so far this year. What worries me is that being long commodities, principally oil, and short the dollar has become a free ride.

What can be done? It's difficult though not impossible. The U.S. along with its trading partners would have to agree on coordinated, widespread intervention on the dollar AND couple that with a statement from the ECB that it sees rate cuts on the horizon (which it doesn't currently and due to the ECB charter AND the legacy of the mighty Bundesbank, often called the dead hand of the Bundesbank, is always hawkish)

However at the end of the day given the significant weakness in the economy the dollar, correctly, should not be the first priority as we are, after all, a reasonably contained domestic economy.

Though it is creeping up the ladder in large part due to the cost of energy.