Wednesday June 4, 2008 - 18:00:28 GMT
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Forex Blog - G8 Meeting in Osaka June 13 Not Accord Setting Gatherin
With Bernanke dropping a
bomb on dollar bears Tuesday, I have read in a number of places about the
upcoming â€śG7â€ť meeting in Osaka as
a potential launching pad for a dollar accord rocket. The problem here is
G7 is really G8 and only finance ministersâ€¦no central bankers attendâ€¦and it is
designed to pen an economic statement for the heads of state meeting that
follows in July. G8 includes Russian finance minister plus G7 and
Eurogroup Chair. No central bankers no accord.
Euro policy is a mainly ECB
venture though Eurogroup is involved. Can an accord on the dollar emerge
from a G7 meeting without the ECB there? Or the Fed for that matter even
though the Fed has no direct role in fashioning US dollar policy?
I think the latest
ratcheting up of urgency over the weak dollar by Paulson and Bernanke faces
some serious tests ahead.
First test that comes to
mind is put up or shut up. Verbal intervention needle runs to empty fast
without some shift in Fed policy (beyond confirming the Fed is on hold) or
currency intervention (where success is often a function of central bank policy
shifts). We can rule out Fed tightening aheadâ€¦the banks need positive
slope to the yield curve to recapitalize a la Japanese banks in the 1990â€™s and
the US economy remains seriously challenged on many fronts from high commodity
prices to falling home values, not to mention a credit crunch. One
of my reasons for why currency intervention is suddenly an optionâ€¦albeit not a
likely option. In the seven years Bush has occupied the White House this
is the first time that I can say currency intervention is a measureable risk.
Second test is Thursdayâ€™s
press conference/ECB statementâ€¦will Trichet play ball with Bernanke and Paulson
and stress that ECB rates are appropriate even with the run up in HICP in May
to a record 3.6% while reiterating that it is key to read the remarks of US
officials on the dollar. This is well short of an accord but it would be
a departure from how Trichet responded to US Treasury efforts in late April to
point out to the press (FT first) that the Bush admin was serious about no mas
(non plus) on dollar weaknessâ€¦Trichet sacrificed this message on the alter of
inflation at the May ECB governing council press conference.
The third test is Fridayâ€™s US jobs data for May and non-farm payrolls in
particular (NFP is like buying a car solely based on a picture of a door
panel). US fundamentals still stinkâ€¦financials, home prices,
autos, airlines, retail and now state and local government (forget about that
20K plus a month add in jobs from this sectorâ€¦more like a sign change needed
for this assumption). Hard to see how the Fed and Treasury can will the
dollar higher when US fundamentals are not cooperating, even in an ugly contest
against the euro (trust me this is all about euro and dollar, not yen and
dollarâ€¦fight for reserve currency statusâ€¦yen is not even a runner up).
My bottom line is the Fed
and Treasury are going to learn quickly that if you go all in on a higher
dollar you better be holding at least an intervention card and be ready to show
it. Otherwise it is back across the deck of USS Dollar and Bernankeâ€™s
date with dollar policy will be forgettable.
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