Wall Street has rallied since George W. Bush painted the country red, led by the stocks of defense contractors, pharmaceutical companies and insurance peddlers that expect to benefit from four more years. But Bush hasn’t fared so well in what we might call -- with a nod to the vanquished John F. Kerry -- the global test. In what amounts to a vote of no confidence in the U.S. economy, the dollar has faded against the euro and the yen on fears that a second Bush administration will continue to do to the nation what the first did -- hobble it with a lot more debt.
The weak dollar reflects growing concerns that Washington is unwilling or unable to get its books in order. Foreign investors also worry that the president and Congress will bend in the face of growing protectionist pressure from apparel companies, furniture makers and other industries being pummeled by cheaper foreign goods. Anything that hurts confidence in this country’s economy would be bad news, because the United States is increasingly dependent on foreign investment.
The administration blithely maintains that it wants a strong dollar and that the U.S. economy will grow itself out of any problems. Future growth, the rosy story line suggests, will drive new tax revenue, even as American companies make goods so attractive that foreigners can’t resist.
The last week did bring good news on that front, with September’s trade deficit coming in slightly lower ($51.6 billion) than had been predicted. The Federal Reserve also nudged up interest rates, though they still will have to be raised further to stem the erosion of the greenback’s value. On Wednesday, the dollar slipped to a new all-time low against the euro.
The world’s central banks clearly are feeling political pressure to intervene on the increasingly touchy subject of whether exchange rates reflect economic realities. Regardless of that debate, the dollar will remain hamstrung by the administration’s refusal to raise taxes or cut spending. The danger is that in order to continue attracting foreigners’ money, the day will come when the Fed will have to respond to a weak dollar and widening federal and trade deficits by raising interest rates more abruptly than otherwise prudent.
After all, the buck has to stop somewhere.