U.S. Treasury Secretary Henry Paulson expects more of the losses in the U.S. mortgage industry that have already damaged the dollar, but predicted a long-term recovery for the battered currency.
"We have very much a strong dollar policy; that's in our nation's interests," he said in a South African radio interview. "Our economy, like any other, has its ups and downs and its long-term strength will be reflected in our currency markets."
Paulson was in South Africa to address a U.S.-Africa business summit and for a weekend meeting of finance ministers and central bankers from the G20 group of developed and big developing nations.
The dollar has suffered in past months, as losses in the U.S. mortgage industry have led the U.S. Federal Reserve to cut interest rates to protect economic growth. Although lower interest rates can jump-start an economy, they can also weaken a currency as investors transfer funds to countries where they can earn higher returns.
Paulson said subprime mortgage losses, from loans made to people with weak or short credit histories, will probably worsen in the months ahead 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.
Still, Paulson said the mortgage problems aren't a "black hole" and the U.S. economy will weather the turbulence and continue to grow.