Obama: Boosting economy best way to aid dollar

White House hopeful Barack Obama said on Tuesday the weakness in the U.S. dollar reflects the soft economy and large trade deficits, and the best way to strengthen the currency is to restore the economy's health.

Obama, a Democrat, said that if he is elected president his policy on the dollar would focus on fixing woes such as the housing crisis that have had ripple effects on other areas of the economy, rather than on trying to manipulate the currency.

"The dollar is both a problem by itself, but it's also a symptom of underlying problems," Obama told reporters on his campaign plane in response to a question.

"I'm not somebody who thinks that we should spend a lot of time manipulating our monetary or fiscal policy simply to strengthen the dollar. What I want to do, though, is strengthen the economic fundamentals in such a way that the dollar, of its own accord, ends up being strong," he said. "I do think we should have a dollar policy."

Currency policy is rarely a topic of discussion in U.S. presidential campaigns but the softness in the dollar, which has suffered a five-year slide, is contributing to higher costs for oil and other commodities that are priced globally in greenbacks.

The dollar fell against the euro on Tuesday as U.S. housing starts in May plunged to the lowest level in more than 17 years. The weak housing report cast more doubt on the possibility that the Federal Reserve would boost interest rates to curb inflation.

Higher interest rates can help the dollar by making fixed-income assets denominated in the currency more attractive to international investors, but can also dampen economic growth by raising the cost of borrowing.

Obama said tackling problems such as the housing crisis will cause credit markets to function more smoothly.

"The economy will start to rebound and the Fed will then have some flexibility. It won't feel pressure to continually lower interest rates, which in turn weakens the dollar, which in turn creates a spiral because that causes oil prices to spike up and contributes to inflation," he added.

MCCAIN BACKS STRONG DOLLAR

Obama's rival in the November presidential election, Republican John McCain, supports a strong dollar policy and would be prepared to intervene if circumstances demanded, his top economic adviser, Carly Fiorina, has told Reuters.

McCain, an Arizona senator, would strengthen the dollar by reining in government spending and pushing free trade agreements to bolster investor confidence, Fiorina said in a Monday interview.

Another McCain ally, former U.S. Trade Representative Rob Portman, said the dollar's decline had helped increase exports, which have helped to stave off a recession.

"We have, I think, benefited in part in terms of the export side of things, from some adjustments in currency. I think some of those were long overdue," Portman said on a conference call earlier on Tuesday. "There was a needed adjustment there."

Obama also said the weaker dollar appeared to be helping the export sector of the economy.

Obama, an Illinois senator, was pressed on whether he would support tapping the U.S. emergency oil stockpile known as the Strategic Petroleum Reserve to help bring fuel costs down.

He said he opposes using the stockpile for anything but a dire emergency and said it was one of the few issues in which he agreed with President George W. Bush's administration.

"I do agree that we have to think about the strategic oil reserve as a insurance policy for a huge disruption -- one in which the economy is potentially crippled," he said. "We're not at that stage obviously."

Obama also weighed in on concerns about speculation in the oil market. Some critics of the U.S. regulatory system see such speculation as culprit in the surging prices and contend more should be done to guard against market manipulation.

Obama agreed with those concerns.

"I think we have to have a much better job of monitoring irregularities within these markets," he said. "I would distinguish between the market itself, which can serve a useful function and abuses of the market, which may be taking place and I think are worthy of investigation."

(Additional reporting by Andy Sullivan; Editing by Eric Walsh)

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