Danger to dollar as Rubin departs

By Rod Oram

Between the lines

Thanks to the efforts of the Committee to Save the World, Treasurer Bill Birch will give a relatively reassuring view of the global economy when he delivers his Budget speech next Thursday.

It is a swift turnaround from the perilous outlook at the time of the previous Budget. Then, a sinking yen threatened to trigger a more dangerous chapter in the Asia Crisis, an imploding Russia was starting to worry world financial markets and Brazil was beginning to unravel.

If some or all of those dangers had come to pass, then global deflation would have been a distinct possibility.

It is too simplistic to suggest that three Americans - the so-called committee Time magazine identified earlier this year - did indeed save the world.

But to Federal Reserve Chairman Alan Greenspan, US Treasury Secretary Robert Rubin and his deputy Larry Summers go the lions' share of the credit. Their distinct but complementary skills kept the US economy and Wall Street on track and helped create international solutions.

The official signal that we could all breath easy again came late last month with the declaration by the Group of Seven leading industrial countries that the crisis appeared to have passed.

Thus world markets took in their stride this week Mr Rubin's resignation and Mr Summers' nomination to succeed him. And no doubt, Mr Birch felt no need to revise his Budget address.

Whether the transition is in fact seamless remains to be seen. Two key aspects to watch are Mr Summers' political skills and the progress of the US dollar.

In contrast to the smooth and calculating Mr Rubin, the out-spoken Mr Summers has shown some poor political judgments at home and abroad. Nor is he expected to change his ways. Thus, international economic relations could be a tad more tetchy when the next crisis erupts.

Reviving the US dollar was one of Mr Rubin's great successes. It hit a post World War Two low against the yen of Y79.75 in April, 1995, three months after he took office but deft management at home and abroad turn it around.

A strong US dollar has been a prime contributor to stabilising the world economy by, for example, sucking imports into the US and underpinning financial markets.

But in the past five or six weeks, a fundamental shift in perception has taken place in currency markets. As the threat of economic collapse ebbed, the focus has shifted to renewed growth, albeit at a gentle rate. But in anticipation of brisker demand, commodity prices have started to rise.

In tandem, the US dollar has weakened while the yen has strengthened, pulling the Australian and New Zealand dollars with it.

Given that Mr Summers might prove less adept with the greenback than was Mr Rubin, there is a danger the US dollar will fall -and the New Zealand dollar will rise - a bit faster on the new man's watch.



Thanks to the efforts of the Committee to Save the World, Treasurer Bill Birch will give a relatively reassuring view of the global economy when he delivers his Budget speech next Thursday.

It is a swift turnaround from the perilous outlook at the time of the previous Budget.

Then, a sinking yen threatened to trigger a more dangerous chapter in the Asia Crisis, an imploding Russia was starting to worry world financial markets and Brazil was beginning to unravel.

If some or all of those dangers had come to pass, then global deflation would have been a distinct possibility.

It is too simplistic to suggest that three Americans - the so-called committee Time magazine identified earlier this year - did indeed save the world.

But to Federal Reserve Chairman Alan Greenspan, US Treasury Secretary Robert Rubin and his deputy Larry Summers go the lions' share of the credit.

Their distinct but complementary skills kept the US economy and Wall Street on track and helped create international solutions.

The official signal that we could all breath easy again came late last month with the declaration by the Group of Seven leading industrial countries that the crisis appeared to have passed.

Thus world markets took in their stride this week Mr Rubin's resignation and Mr Summers' nomination to succeed him.

And no doubt, Mr Birch felt no need to revise his Budget address.

Whether the transition is in fact seamless remains to be seen. Two key aspects to watch are Mr Summers' political skills and the progress of the US dollar.

In contrast to the smooth and calculating Mr Rubin, the out-spoken Mr Summers has shown some poor political judgments at home and abroad.

Nor is he expected to change his ways. Thus, international economic relations could be a tad more tetchy when the next crisis erupts.

Reviving the US dollar was one of Mr Rubin's great successes.

It hit a post World War Two low against the yen of Y79.75 in April, 1995, three months after he took office but deft management at home and abroad turn it around.

A strong US dollar has been a prime contributor to stabilising the world economy by, for example, sucking imports into the US and underpinning financial markets.

But in the past five or six weeks, a fundamental shift in perception has taken place in currency markets.

As the threat of economic collapse ebbed, the focus has shifted to renewed growth, albeit at a gentle rate. But in anticipation of brisker demand, commodity prices have started to rise.

In tandem, the US dollar has weakened while the yen has strengthened, pulling the Australian and New Zealand dollars with it.

Given that Mr Summers might prove less adept with the greenback than was Mr Rubin, there is a danger the US dollar will fall -and the New Zealand dollar will rise - a bit faster on the new man's watch.