Sunday September 16 2:52 PM ET

Analysis: U.S. Dollar Intervention Looms? By Anna Willard

WASHINGTON (Reuters) - Normally, the free-market worshiping members of President Bush (news - web sites)'s economic team quake at the thought of intervention in the foreign exchange markets. But exceptional times call for exceptional measures.

Proving it's not business as usual after last week's horrific attacks erased the twin towers of the World Trade Center from New York's skyline and damaged the Pentagon (news - web sites), analysts are expecting U.S. authorities to step in if the dollar moves sharply after the country's stock markets try to resume normal trading Monday.

Dollar strength is a symbol of U.S. economic might. But the currency, already on shaky ground before the attacks because of fears about the U.S. economy, runs the risk of further weakness amid growing concern that this shock to consumer confidence could trigger a global downturn.

``I think that the Bush administration would regard -- not to overstate the issue -- a sharp dollar sell-off as a national security issue...At the very least, it would spark quiet intervention,'' Paul Podolsky, currency strategist at Fleet Global Markets.

Since the first plane hit the World Trade Center last Tuesday, the dollar has sunk 2 percent against the yen, and the euro risen more than 3 percent against the U.S. currency.

Japanese Finance Minister Masajuro Shiokawa said on Friday he had agreed with U.S. Treasury Secretary Paul O'Neill to take appropriate steps on currencies if their movements become volatile. As yet, there has been no confirmation of this from Treasury, which must authorize purchases of U.S. dollars to boost the currency.

In July, Bush himself said that markets should determine the level of the dollar, a statement that was taken by most traders to mean this government is far less likely to take part in a market foray than the previous administration.

The U.S. central bank, which intervenes at the request of Treasury, last stepped into the currency markets in September last year to support the euro at the request of the Clinton administration.

THIS TIME IS DIFFERENT

But this situation differs from even the worst scenarios envisaged by the Bush team. And observers expect some of the usual economic principles to take a hike as U.S. officials stand ready to take extraordinary measures to reassure investors that the United States is a still a good destination for their cash.

``These are special times now, that's the difference. This government wants to do everything it can do to instill confidence,'' said Paul Kasriel, chief economist at Northern Trust. ``So if there were a very sharp disorderly fall in the dollar, then I wouldn't put it past them to want to come in and do something.''

Even those most opposed to tampering with prices in free markets in Bush's economic team would find such a move quite easy to justify within the framework of U.S. dollar policy.

The crux of the policy, according to O'Neill, is that the currency's value should always reflect fundamentals of the U.S. economy. U.S. officials believe in a strong dollar because the U.S. economy is strong, so the story goes.

And since Tuesday's tragedy, Bush administration Treasury officials have taken pains to emphasize that the outlook remains positive.

Vice President Dick Cheney (news - web sites), for instance, said on Sunday that the economy was strong, and even though the U.S. ``quite possibly'' was in recession right now, he expected it to rebound later this year. Cheney also urged Americans not to change their spending habits.

While private economists have said the negative impact on consumer confidence could tip the economy into recession, O'Neill, who will be making the rounds in New York and ringing the opening bell on the New York Stock Exchange (news - web sites) on Monday, has stoutly maintained his confidence that prospects for an economic rebound are still intact.

``I didn't think we were heading into a recession on the 10th of September,'' the Treasury chief said in an interview on CBS television. Pressed if he thought the economy was now headed toward a recession, he replied, ``No, I don't.''

So as long as Bush's economic team continues to state adamantly that the attacks will not have a significant impact on the economy, then it would be consistent for Treasury to instruct the Fed to step in if the dollar plummets.

Of course it's possible that the dollar, as one of the traditional safe-haven currencies in times of stress, will weather the storm.

``The dollar is the traditional safe haven and will continue to be so,'' said David Blitzer, chief investment strategist at Standard & Poor's Credit Market Services.

Indications so far, though, are that the dollar is in for a difficult ride.

The greenback tumbled to its lowest levels in more than six months against European currencies and the yen on Friday as pessimism mounted.

Major central banks have injected massive liquidity to try and reassure edgy markets, but concern has mushroomed over the U.S. economy nonetheless.

Options markets show that the dollar may stay pressured for months by the uncertainty after Tuesday's attacks.

``These were attacks on the United States and therefore the safe-haven role of the dollar has been compromised somewhat,'' said John Rothfield, currency strategist at Bank of American in San Francisco.

In late trading on Friday, the dollar was at 0.9207 against the euro and at 117.30 against the Japanese yen.

http://dailynews.yahoo.com/h/nm/20010916/bs/attack_dollar_intervention_dc_1.html

-- Martin Thompson (mthom1927@aol.com), September 16, 2001

Answers

I would really be surprised if the U.S. did not step in with a massive intervention this coming week.

-- Big Cheese (bigcheese@multimax.net), September 16, 2001.