The latest test for Clintonomics: Larry Black in New York looks at the failure of the dollar intervention

WALL STREET traders are not generally known as big readers, particularly when the subject is politics. But an informal survey of trading-floor desktops last week suggests that The Agenda, an account of President Clinton's first months in office by Watergate reporter Bob Woodward, is their kind of literature.

'You mean to tell me that my re-election hinges on the Federal Reserve and a bunch of fucking bond traders?' the President is quoted as asking his economic advisers on the eve of his inauguration.

Mr Clinton made his peace with the 'bond-market vigilantes', as Mr Woodward's book explains, abandoning election promises to focus on cutting Washington's huge deficit. (He went even further with Fed chairman Alan Greenspan, Mr Woodward claims, agreeing on a specific number - dollars 140bn less in annual spending by 1997 - in exchange for Mr Greenspan's endorsement)

But now it seems Mr Clinton, like the British Government two years ago, is going to have to come to terms with the forex vigilantes.

With the failure of Friday's dollars 5bn buying spree by central banks in defence of the dollar, Clintonomics - once so successful - is now squarely under attack in the financial markets. The Dow is in free- fall and US bond yields are climbing, despite healthy growth and four interest-rate rises, all endorsed by the administration. The results of the dollar intervention were 'a global vote of no confidence' in the President's policies, one Republican senator said, reflecting the mood among many New York currency traders.

Beyond the underlying economic reasons for the dollar's slide, investors have doubts about the administration's resolve to support it, suspecting deliberate devaluation as part of Washington's trade strategy. Commentators here have started to speak of the 'Carterisation' of the dollar, comparing Mr Clinton's 'puzzling' over the slide with his predecessor's criticism of market 'misperceptions'.

And thanks to the revelations of The Agenda, the dollar's plight in coming weeks will not only be a test of Clintonomics, but also of its 'ghost-writer', as Mr Woodward at one point describes Mr Greenspan. Even the Fed chairman's friends have questioned his independence in recent weeks, and are pressing him to lift US interest rates yet again to defend the dollar.

'For 18 months,' the Wall Street Journal's Washington columnist, Paul Gigot, wrote last Friday, Mr Greenspan 'has been the little Dutch boy in the dike of Clintonomics, the main source of investor confidence'. But now inflationary leaks are springing, Mr Gigot went on, challenging the Fed chairman - a life-long Republican and a self-described libertarian - to pull out his finger and 'reassure the market about his job description' by raising US interest rates next week by almost a full point.

Interest rates may well rise after the Fed's policy committee meets on 5 and 6 July, and then again they might not. But this would hardly prove that Mr Greenspan is acting as a 'shield for the President', as one California Republican suggested in questioning him last Wednesday. 'I think that this is very unproductive as a view,' the chairman replied.

Nor would a rise in US rates necessarily reflect Fed concern over exchange rates. On the one hand, as Mr Greenspan noted in his testimony, there is considerable debate about just how inflationary a declining dollar is for the US economy. On the other, the American currency, despite all the recent selling, has actually risen 1 per cent against the German mark since President Clinton took office, and its decline against the yen is no more steep than it was under President Bush.

Another rise in rates, notes David Hale, chief economist with Kemper Financial Services in Chicago, 'is not a sign of policy failure, but a natural consequence of an economy regaining momentum'. In the face of the increasingly partisan rhetoric, it is worth noting that the Clinton administration has in fact embraced each of the four increases earlier this year - despite the fact that bond yields have now risen by some 200 basis points, obscuring the most publicly visible achievement of Clintonomics.

The Woodward book also reminds the markets, despite their suspicions, of the extent of the conversion in January 1993, when the new administration, which had come to office pledging a middle-class tax cut and dollars 200bn of public investment in education, infrastructure and technology, opted instead for what it called the 'financial markets' strategy. Fiscal austerity was a difficult reversal for the President and his advisers - 'We've all become Eisenhower Republicans,' he despaired - and one that held little prospect of political payoff.

Mr Clinton didn't campaign on the theme but, faced with a ballooning budget deficit, he decided he had little choice but to trust his fate to the market. And if his original agenda was hijacked by a combination of global capital mobility and the legacy of Reagan-era spending, his choices haven't widened much in the meantime. There's no reason to believe he will abandon the 'financial markets' strategy now, losing hard-won credibility by either dropping support for the dollar only six weeks after implementing it, or turning on the Fed.

Mr Hale, the Kemper economist, believes the real risk to the US bond market - and by extension, the dollar - comes not from the Clinton administration (nor Mr Greenspan, for that matter), but from a misconception that his fiscal policy has failed. Institutional investors may have grasped the importance of Mr Clinton's conversion 18 months ago, driving up bond prices, even if Washington and the media did not.

But now the reversal in those yields since January is being portrayed as evidence of a failure in the financial media and in Congress, Mr Hale says, with the result that Mr Clinton is presiding over a 'voteless recovery'.

His administration is not being given credit for its successes, encouraging debate of populist alternatives - costly consumption-driven measures the US can ill afford. It will also make it that much more difficult for Mr Clinton to realise the rest of his agenda - the big public investments the US requires to enhance productivity and improve living standards.

In the end, Mr Clinton and the forex vigilantes will agree that no amount of exchange- rate manipulation can replace sound savings policies.

(Photographs omitted)