U.S. Treasury Secretary Henry Paulson Friday said a strong dollar is in the nation's industry, but noted that parts of the subprime housing market will likely worsen over the next few months.
With a strong dollar policy in place, a rebound is expected and the U.S. economy's long-term strength should help the currency, he added during a radio interview in South Africa.
Paulson warned that several aspects of the U.S. subprime mortgage crisis could become worse before getting better.
We have very much a strong dollar policy; that's in our nation's interests, he said. Our economy, like any other, has its ups and downs and its long-term strength will be reflected in our currency markets.
Paulson went to address a U.S.-Africa business summit. This weekend he will meet with finance chiefs and central bankers from the Group of 20 economies.
Subprime mortgage losses, from loans made to people with weak credit histories, will most likely worsen over the next months as variable-rate mortgages reset to higher rates.
The subprime market, parts of it will get worse before it gets better, he said. This reflects the fact that some of the most lax underwriting for mortgages occurred in 2005 and 2006, and many of these loans are still operating under low introductory rates, he said. As they reset, more defaults are likely.
In recent months, the dollar has steadily declined against the euro, the yen and most other currencies due to losses in the U.S. mortgage industry. This led the U.S. Federal Reserve to cut interest rates to protect economic growth. Lower interest rates can ignite the economy, but it can also weaken a currency as investors transfer funds to other countries where higher returns are expected.
The interview was on 567 Cape Talk radio.