In spring 2008, financial markets witnessed the early makings of what may emerge as globally coordinated support for stabilizing the U.S. dollar. The first signs occurred at the April G8 meeting in Washington, D.C., where finance ministers and central bankers of the world’s leading economies expressed concern about the economic repercussions of persistent damage in the U.S. currency. Not only had a rapidly falling dollar further deepened the emerging economic slowdown in places such as Europe, Japan, and Canada by excessively lifting their currencies and hampering their exports, but it also signaled the acceleration in the dollar price of key commodities, such as oil and food, which boosted the cost of these imports and lifted inflation at home. Never since the 1980s has the United States and its trading partners experienced such a deep and protracted loss in the value of the dollar, and not since the Louvre Accord of 1987 have the world’s leading economies expressed such broad concern with the falling U.S. currency.
The U.S. Dollar Index lost 40 percent of its value between January 2002 and April 2008, averaging a decline of 8 percent per year. On June 3, 2008, Fed Chairman Ben Bernanke shook the currency market by taking the unusual step of talking up the dollar in a speech at the International Monetary Conference in Barcelona, Spain. The topic of the dollar had long been the purview of the U.S. Treasury since the 1990s, when then Treasury secretary Robert Rubin shaped the so-called “strong dollar policy.” But as the currency slipped into a multiyear decline between 2002 and 2007, the strong dollar policy was limited to mere rhetoric and no action.
In fact, the real currency policy of the United States had grown to be that of benign neglect as Treasury officials tacitly encouraged a depreciating dollar so as to favor U.S. exporters. Meanwhile, the Federal Reserve’s actions were everything but dollar positive when policy makers engaged in aggressive easing of monetary policy by sharply slashing interest rates in two different easing cycles within less than five years. In the aforementioned speech, Bernanke said, “We are attentive to the implications of changes in the value of the dollar for inflation and inflation expectations and will continue to formulate policy to guard against risks to both parts of our dual mandate, including the risk of an erosion of longer-term inflation expectations.” The speech was largely perceived as a potential sea change in the U.S. economic priorities vis- ` a-vis the value of the dollar.
