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Tuesday May 13, 2008 - 13:41:30 GMT
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Forex Blog - For US Treasury It's Show Me Time on the Dollar

It is hard to remember a time when the US dollar has experienced a major trend change without some form of coordinated currency intervention by G7 central banks and finance ministers.  Indeed the last example of joint currency intervention occurred in September of 2000 when the European monetary authorities (ECB and finance ministers) sought and won the support for a G7 effort to support the then beleaguered euro.  The euro continued to fall but by the end of October the currency had put in a bottom and that (at .8225 - yes it took $0.82 to buy a euro)  was the start of the long-term uptrend that has taken the euro to a record high versus the dollar above 1.60 (record dollar low).  Trust me I am not saying that joint currency intervention is the measure that sustains long-term currency trends - it is not.  But it usually occurs at or around turning points and reflects a collective consensus of major currency misalignments or overshoots.  

So why is US Treasury all bark and no bite when it comes to backing up words (deep background) with actions?  I have said before that ideologically there is sizeable institutional bias (appointed officials) against intervening in financial markets - this shows up as skepticism over the efficacy of currency intervention and the administration's emphasis to address the subprime mortgage crisis with volunteerism (Hope Now Alliance).  

But it also reflects the belief within the administration that the fundamentals are turning in favor of the dollar and all officials need to do is shine a light on these changing economic and monetary conditions.   For example - the Fed is on hold (I still have lots of doubt over this despite the Fed's signaling this intention April 30).  Treasury Secretary Paulson last week said the worst of the credit crisis is behind us.  White House economist (CEA Chairman) Lazear said last week that the US economy is not now nor has it been in recession.  And US officials have tried to play up signs that the Euro Zone economy is sputtering.  Too bad ECB President Trichet has such a tin ear - he failed to deliver any message of change in the ECB's outlook for inflation-growth last Thursday at the post ECB Governing Council meeting press conference leaving markets believing rates are on hold through the end of the year.  So much for the message of unity on achieving a stronger dollar...unity of wishes not actions is more like it.

Never say never when it come to currency intervention and even with the current administration that is predisposed to market solutions (though this approach has been seriously challenged in the credit crisis and subprime mortgage market in particular).  But my take is the Bush administration including US Treasury will not turn to currency intervention unless there is a legitimate dollar crisis. 

So wishing the dollar higher without the ECB carrying its share of the policy burden is empty.  

It is still curious as to what drove the Treasury to meet and speak to the press off the record last week on the desire for a stronger, more stable dollar, and to take credit for the shift in the FX language at the Washington G7 meeting in April?  Well the dollar was rallying  and looking like the markets got the message from G7 if with a lag - take credit ex post if it goes your way - do not commit ex ante.  

It is also curious that the market is paying so little heed to official Treasury dollar policy adjustments - they don't happen often and in the past (as in before the Bush presidency) these off-the-record utterances we have been reading about since last Wednesday's FT article have been largely ignored.  Sadly this may have more to do with the timing of the articles - FT just before a no change ECB press conference/statement and then again Friday when the WSJ piece on Treasury dollar concerns flew under the radar by showing up on the WSJ on-line Econoblog and most in the FX market never saw it until the weekend when the article was put on the newspaper.  Weekend news is often more muffled when markets reopen than would be the case if news on policy change came out during local market hours...Treasury needs better news management skills than what they demonstrated since last Wednesday if they want more bang for the verbal buck.  


David Gilmore


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