All the interventions that have been modelled would do damage to the US economy... so I don't find it very appealing to say we're going to cut off our arm because someday we might get a disease in it

Paul O'Neill US Treasury Secretary

Last week, official figures said if the US grew at the rate seen in the first three months of this year for the whole of 2002, the total expansion would be 5.8%, the best figure for two years.

That may slow down a little in the current quarter if Wednesday's index from the Institute for Supply Management - which measures manufacturing activity and indicated a slightly lower figure for April than March - are to be believed.

But the trend still looks set for relatively strong growth.

"This performance is a testimony to the inherent resilience of our economy that over the past six months has continually surprised on the upside," said Mr O'Neill.

Loose talk

Mr O'Neill has previously expressed his confidence in the underlying strength of the US economy.

But his carefully-prepared opening statement disappointed observers by failing to repeat some of his earlier comments about the strength of the US dollar shortly after he was appointed.

The result was intense press scrutiny of his performance, and fluctuations on the currency markets, on suspicions that he did not favour a strong dollar.

Mr O'Neill was forced to explain that if he was going to change the strong dollar policy - as he put it - he would hire the 60,000-seat Yankee Stadium in New York to announce it.

Strong dollar stays

This time, Mr O'Neill made it quite clear that no change was forthcoming.

Only speculators gained from sharp fluctuations in the currency markets, he told the Senate Banking Committee.

His essential position remained unchanged: that if the markets want a strong dollar, they will get one - regardless of the pressure building in some quarters of the political arena to massage it downwards.

"The markets are grinding so finely and they're so interlaced... that it's not possible any more to actually fool markets for very long," he told the committee.

"[You can't] create an artificial situation that's not in line with the judgment of the market about the discounted present value of productivity improvements relatively between countries."

Manufacturing in pain

This line is unlikely to go down well with opponents of the strong-dollar policy testifying before the committee and elsewhere.

Manufacturing groups in the US say the dollar is dangerously overvalued, costing jobs, slashing exports and artificially subsidising imports.

Fred Bergsten, head of the well-respected Institute for International Economics, said that he believed the dollar was worth 20-25% too much.

For every percentage point the dollar rises, he said, the trade deficit expanded by $10bn, and unless policy changed gradually the result would be a sharp, and very painful, correction in the future.

No alternative

In his own testimony, Mr O'Neill sympathised with the plight of US workers at the sharp end of the strong dollar.

"I know these are issues where your heart breaks for the people that are directly affected by these things," he said.

"I suppose it's no solace at all to the individuals who are directly affected but I think it's demonstrably clear that in fact... US citizens as a body, and the world as a body, are better off if we let competition and best-value products lead the world."

The current account deficit - the broadest measure of whether imports outweigh exports and by how much - was $417.4bn last year, not far off an all-time high.

At 4% of total national output, the deficit has more than doubled from the 1.5% or so which was usual in the mid-1990s.

Despite the size of the deficit, Mr O'Neill said concerns like those of Mr Bergsten "ignore forces that are working in the market".

"All the interventions that have been modelled would do damage to the U.S. economy if we decided to reduce the size of the current account deficit," he said.

"So I don't find it very appealing to say we're going to cut off our arm because someday we might get a disease in it."