Bush Pledges Stronger Dollar

President Bush, facing complaints from a European ally about the weakening dollar, said Wednesday that he favored a strong dollar and would work with Congress to cut the massive federal budget deficit that puts downward pressure on the U.S. currency.

But before Bush spoke, Vice President Dick Cheney reiterated to a White House economic conference that the administration supported more tax cuts, which some analysts said could deepen the budget deficit and threaten the dollar’s value.

The White House conference, which continues today, is intended to pave the way for Bush to promote changes to Social Security that the White House has said would probably require more federal borrowing.

Despite Bush’s statement of support for a strong dollar, the U.S. currency weakened further on international markets, losing more than 1% of its value against the Japanese yen and nearly 1% against the euro.

The dollar’s slide illustrates the difficulty Bush faces as he tries to assemble a set of economic policies that work in concert with his political goals. Trading partners have complained about the weak dollar, which makes U.S. goods cheaper on international markets, and Bush said Wednesday that he wanted to cut spending and reduce the deficit to create an environment that would strengthen the dollar.

At the same time, the president’s top priorities include extending tax cuts, revamping Social Security and spending money for the Iraq war, all of which could add to the deficit and weaken the dollar.

From Europe’s viewpoint, the euro’s ascent compared with the dollar had damaged sales of its goods in the United States. This is why Italian Prime Minister Silvio Berlusconi, on a visit Wednesday to the White House, complained to Bush about the weak dollar, which has declined about 35% against the euro since February 2002. The euro is the currency of Italy and 10 other European nations.

“The policy of my government is a strong-dollar policy,” Bush said after meeting with Berlusconi.

“He expressed his concerns about the relationship between the dollar and the euro,” Bush told reporters in a brief Oval Office interview, with the Italian leader by his side. “I told him we’re going to take this issue on seriously with the Congress. The best thing that we can do from the executive branch of government in America is to work with Congress to deal with our deficits.”

Analysts said Bush had little choice but to stand behind the dollar.

“Comments about a strong dollar are kind of like saying, ‘I’m all for education, motherhood and apple pie,’ ” said James Paulsen, chief investment officer for Wells Capital Management in Minneapolis. “It’s pretty much meaningless. The president can’t get up in front of the nation and say, ‘I’m for a weak dollar.’ ”

Some analysts said Bush might prefer a weak dollar because it helped U.S. companies sell goods abroad. But analysts said that if Bush declared his support for a weaker dollar, investors might form a stampede to sell dollars, draining U.S. markets of needed capital and driving interest rates up.

“I think he would prefer a weaker dollar, but he can’t come out and say it,” said Mark Zandi, chief economist at Economy.com in West Chester, Pa. “I think he’s afraid that the markets would overreact.”

“The U.S. government has regularly repeated the strategic policy to maintain a strong dollar,” said Jack Malvey, chief global fixed income strategist for the investment house Lehman Brothers. “However, the markets have observed that the U.S. is not opposed to a tactical policy of a weaker dollar.”

The euro’s value in New York trading rose from $1.331 Tuesday to $1.341 Wednesday, nearing the record $1.345 reached Dec. 3. The dollar has become so cheap, Malvey said, that some Europeans are coming to New York just to shop; the bargains more than offset the plane fare.

But while the weaker dollar may have retarded the growth of the U.S. trade deficit, it has not reversed it. The Commerce Department reported Tuesday that the trade deficit reached a record $55.5 billion in October -- about $75 million an hour.

The nation’s huge trade and budget deficits are sending a flood of dollars overseas, as Americans pay with U.S. currency to buy foreign goods and the government issues dollar-denominated debt to pay its bills, in essence increasing the supply of dollars.

One effect of the increasing hoard of dollars worldwide is to cheapen the currency’s value, as with anything in great supply, some experts say.

In recent months, another concern has weighed on the greenback: the fear that foreign investors, wary of mounting U.S. debts, might begin dumping Treasury bonds and other U.S. securities, which could send the dollar tumbling anew.

If the Bush administration wanted to stem the dollar’s slide, it could use its foreign currency reserves to buy dollars on the international currency markets. But Bush said Wednesday, “We believe that the markets should make the decision about the relationship between the dollar and the euro.”

Some economists said the next most effective measure would be to reduce the U.S. budget deficit. Some analysts said cutting the deficit would at least send a signal to the markets that the United States was serious about maintaining the dollar’s value.

Bush endorsed that idea, saying “we’ll do everything we can in the upcoming legislative session to send a signal to the markets that we’ll deal with our deficit, which, hopefully, will cause people to want to buy dollars.”

But two and a half hours before Bush reiterated his belief in a strong dollar, Cheney opened a White House conference on the economy by declaring that the administration strongly favored making permanent the temporary tax cuts enacted during the administration’s first four years.

Failure to extend the tax cuts, Cheney said, “would impede capital investment by small-business owners and raise the tax burden on retirees and families investing for their future. It would also result in tax increases for every American who pays income taxes. So we are committed to keeping the Bush tax cuts in place.”

The economic conference will conclude today with a discussion of Bush’s intention to ask Congress to divert some of the Social Security payroll tax to private investment accounts controlled by individual workers.

The government would have to borrow an estimated $1 trillion to $2 trillion over 10 years to replace the diverted payroll taxes and pay traditional Social Security benefits to today’s retirees.

The administration says the borrowing over the next decade is prudent, because every borrowed dollar would eliminate several dollars of Social Security’s long-term unfunded liability -- the upcoming costs of paying benefits to baby boom retirees, for which the government will have insufficient payroll tax revenues.

Bush on Wednesday spoke of that liability as one of the deficits that plagued the U.S. economy. “One deficit is a short-term budget deficit,” he said. “Another deficit is the unfunded liabilities that come with Social Security and some of the health programs for the elderly.”

But some analysts were skeptical of the prospect of Bush’s expected plan, still in sketchy form, to borrow money to restructure Social Security.

“I think it would be negative for the dollar,” said Sung Won Sohn, chief economist at Wells Fargo Bank in Minneapolis. “The reason we’re borrowing $1.8 billion every day from overseas is in part because of our huge budget deficit. If you’re telling the markets that it’s going to get larger, the markets will worry.”

University of Maryland trade economist Peter Morici said, “Eliminating the budget deficit will take years, and it will not give us the quick relief we need on trade and the quick relief we need on the dollar.”

“Likewise, Social Security reform is going to make the budget deficit larger, not smaller,” Morici said. “What this indicates to me is the president is not taking the dollar problem seriously.”

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Times staff writer Tom Petruno in Los Angeles contributed to this report.