WASHINGTON — It's practically part of the job description: Henry M. Paulson Jr., President Bush's choice for Treasury secretary, likely will soon find himself pledging to work on behalf of a strong dollar and a smaller government deficit.
After all, how could a Treasury secretary support a weak dollar and profligate deficit spending?
But circumstances are bound to conspire against Paulson, chairman of the investment house Goldman Sachs, whom Bush nominated Tuesday as his choice to replace John W. Snow.
Market forces are aligned to drive the dollar's value down no matter how many administration officials talk it up.
The dollar is under downward pressure from several factors. For one, the enormous and growing U.S. trade deficit is creating a huge supply of greenbacks abroad as the United States ships hundreds of billions of dollars overseas every year to buy foreign goods. The greater supply of dollars reduces their value.
So far, foreigners have invested most of those dollars back in the United States. But economists warn that their appetite for American investments has its limits -- and that when those are reached, dollars will lose their appeal and their value.
The dollar also has been slipping because of expectations that economic growth is picking up in other countries just as U.S. growth is slowing. In response, other nations are beginning to raise their interest rates while rate hikes in the United States may be nearing an end. By increasing the yield on bonds and other securities, higher interest rates generally make a currency rise in value because they increase demand for bonds denominated in that currency.
"The day will come when China and the rest of the world will tire of lending Americans what they need to live well," said Peter Morici, a University of Maryland business professor.
American consumers generally like a strong dollar because it makes imports less expensive. A weak dollar benefits some, however, among them U.S. companies that sell goods overseas.
Mostly, the administration has not bought or sold dollars in the currency markets to influence its value. That policy is likely to continue, some economists said.
"The Bush administration's non-policy on the dollar leaves the new Treasury secretary with little to do in the currency arena," said Carl B. Weinberg, chief economist for the consulting firm High Frequency Economics. "We wonder why Mr. Paulson gave up such a good job in New York for this one in Washington."
