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May 3, 2002, 8:30 a.m. Still Mighty The dollar’s doing fine, but Washington should say so clearly.

he dollar weakened significantly just before U.S. Treasury Secretary O'Neill made his congressional appearance on Wednesday, most likely on the pre-news that he wasn't going to address the dollar.

O'Neill's written testimony on international economic and exchange-rate policy was apparently available early Wednesday morning, well before the hearing before the Senate Banking Committee. This written testimony laid out the link between the current account deficit (or trade deficit, in the broadest measure), the capital inflow into the U.S., and the savings/investment imbalance. It attributed the rise in capital inflows to the U.S. to "strong foreign interest in investing in the U.S." And it didn't mention the dollar — so the yen and the euro shot up.’

However, in oral comments to the committee, O'Neill said: ""There's no intent in anything that I say to give comfort to those who think we're going to change our policy [on the dollar] today."

The dollar was massively strong in the late 1990s, and it is helpful to give up a little of that strength as it moves to a more stable value. This would actually be a constructive let-down in the dollar if Washington makes it clear that it does not want dollar weakness, just a stabilizing process for the dollar.

Some of this week's dollar weakness was due to what was not said by O'Neill on Wednesday — he made no forceful statement of a desire for currency stability. Most likely, Washington doesn't want the dollar to weaken much, nor will let it happen. The risk is that an initially constructive let-down in the dollar turns into a momentum-driven capital outflow from the U.S. But don't expect this to happen.

Washington officials, especially Fed Chairman Greenspan, have huge credibility on the dollar (the Fed prints them, after all). Washington's position, if and when it is made clear, will be especially effective given the U.S. recovery, the strength of U.S. productivity growth, and the much better fiscal position of the U.S. versus Europe and Japan.

O'Neill is right on the theory of the current account deficit, but has probably spoken more bluntly and directly on it than markets are accustomed to.The flap about the current account deficit will fade away once the U.S. makes clear its policy on the dollar and the economy shows sustained growth.

— Mr. Malpass is the Chief International Economist for Bear Stearns.