NEW YORK (CNN/Money) - When it's all over, Treasury Secretary John Snow may regret what he wished for.
Thanks to prodding from the United States, Snow and other G-7 finance ministers meeting over the weekend delivered a communique that called for "more flexibility in exchange rates" -- a development that the market is interpreting as a blow against China's pegging of the yuan to the dollar and other Asian countries habit of intervening to keep their currencies weak.
It's easy to understand where the U.S. stance comes from: First, manufacturers complain that the dollar's unnatural strength against Asian currencies hurts them in the international marketplace. Japan's habit of keeping the yen weak, for instance, is little more than a tariff with a twist, because it keeps Japanese product prices lower here and makes it difficult for international companies to gain a toehold in Japan.
From an economics perspective, if you are worried -- as the Federal Reserve is -- that "the risk of inflation becoming undesirably low remains the predominant concern for the foreseeable future," then a weak dollar seems like just what the doctor ordered. The reason: Currency weakening is considered inflationary, because it raises import prices and, in turn, makes it easier for domestic producers to raise their prices.
Given the neat dovetailing of politics and economics, it's not hard to see how Snow came to push for Asian countries to stop intervening in their currencies.
But whenever you muck about in currencies you risk opening up a Pandora's box of unintended consequences. What looks neat on paper can become very messy in practice.
Investors got a first whiff of that possibility already, with Monday's steep rise in the yen and sharp drop in the Asian markets. That stock market weakness fed through into the European session, and U.S. stocks were cued up for a sloppy day.
There is much that could go wrong. To begin with, the world desperately needs an economy that is not dependent, as it has been, on the United States for growth. For that to happen, Asian economies need to see more of a recovery than they have so far. Weakening the dollar threatens to plunge Asia back into recession at a time when the U.S. economy simply isn't strong enough to pull the weight that it used to.
A more immediate problem: One of the offshoots of the steady dollar buying by Asian countries has been a steady build-up in Asian Treasury holdings. Rates have shot up a lot from their June lows, but they would have shot far higher if it hadn't been for steady buying from abroad. The risk is that the Administration's effort to weaken the dollar will lead to a bit of panic in the Treasury market, sending borrowing costs up and pushing the U.S. economy off the road to Wellville.
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