Dollar conspiracies?

IT'S time to dust off a remark John Connally made about the dollar when he was Richard Nixon's Treasury secretary. "It's our currency, but it's your problem."

Three decades later, the problem is back. The dollar's dive against the euro and the yen is turning out to be the defining market move of 2004. After years of ignoring U.S. deficits, the currency market is using the trade and current-account figures as a reason to whack the dollar to a record low against the euro and a seven-month low versus the yen.

The biggest worry for European and Japanese officials isn't just the extent of the dollar's slide. It's the conspiracy theory doing the rounds that says the U.S. would like nothing more than to see a sustained slide in its currency.

Treasury Secretary John Snow has trotted out the standard party line that "a strong dollar is in America's interest." Currency traders ignored him--same as they ignored the surge in U.S. employment reported Nov. 5, when figures showed the economy created twice as many jobs as economists had forecast, and the Nov. 10 Commerce Department release showing the U.S. trade gap unexpectedly narrowed in September.

Are the conspiracy theorists correct? Is a unilateral policy of benign dollar neglect by the U.S. administration set to inflict shock and awe on the financial markets? A look at the motivations of the three most interested groups should help determine how willing the U.S. might be to let the dollar extend its slide.

* The U.S.--While the Treasury is responsible for currency policy, the central bank still has a lot of sway. In the past few months. Fed officials ranging from Chairman Alan Greenspan to St. Louis Fed President William Poole have lined up to disparage their government's spending habits and warn that the twin deficits risk undermining the dollar and driving government borrowing costs higher.

You might almost think the Fed was waving a sign in front of currency traders saying "sell the dollar." A weaker dollar helps the Fed out, giving it room to push its target rate for overnight borrowing higher without facing accusations of killing off the economic recovery.

Greenspan, coming up to his last year at the helm with retirement looming in January 2006, is likely to embrace the dollar's decline as a useful balm. President Bush's administration is likely to do the same, letting the weaker dollar reduce the trade deficit by boosting exports.

* Europe--When crude-oil futures were trading above $50 a barrel, a strong euro looked like godsend helping to cushion the European economy from surging energy costs. Now that oil is close to $40, the dollar's decline is a hindrance rather than a help.

There's little Europe can do to halt the euro's rise. Italian Finance Minister Domenico Siniscalco's Nov. 10 claim that the Group of Seven industrialized countries might be poised for coordinated dollar buying drew a collective giggle from participants in the foreign-exchange market.

* Asia--You can argue whether Japan's efforts to prevent the yen from rising in recent years have succeeded, or whether the dollar might have averaged about 113 yen in the past two years even without billions of dollars of currency market manipulation. Whichever is true, currency traders look poised to test Japan's resolve in preventing spring to 100 yen per dollar.

The wildcard is China. Merrill Lynch & Co. is sticking to its forecast that China will revalue its currency by year-end, and start pegging it to a basket of currencies rather than maintaining the rate of 8.3 to the dollar that's prevailed since 1995.

Suppose Merrill is right. Suppose China starts rebalancing its $500 billion or so of foreign exchange reserves. Maybe it doesn't need as many dollar assets once the yuan is tied to a basket of currencies rather than just the dollar. Suddenly there's an 800-pound gorilla in the market. Selling dollars.