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Friday October 8, 2010 - 01:51:25 GMT
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US Has a Strong Dollar Policy According to Trichet

When JC Trichet has to quote US Treasury Secretary Geithner from February 2010, the last time the top US FX policy cop said a strong dollar is in US best interest, and at a time when the currency is falling like a stone against everything, something is wrong with the picture.  It is not as if Geithner and other administration officials have not had an opportunity to repeat the dollar mantra since February.  Indeed Geithner spoke about FX and imbalances Wednesday at Brookings and never said anything.  He was also interviewed Wednesday and again he said nothing.  It is not as if he forgot to.  He is deliberately avoiding saying it.  Why?


It is a lever at weekend meetings no doubt.  Europe and Japan which stands to lose the most from a falling dollar are super anxious to hear the utterance…not because it means much for where USD trades, but because it would signal there is no change in dollar policy.  By deliberately avoiding repeating the mantra, Geithner (and Obama) is upping the ante and dangerously so if Mantega is to be believed (Brazil’s finance minister who said the world is at risk of a currency war) to bring pressure to bear on Europe and Japan (Canada too) to pressure China to do more to allow the yuan to appreciate.  And as long as the USD decline is orderly (not negatively impacting US asset prices…and if anything it is helping US equity prices move up), Geithner is quite happy with the depreciation in the currency.  For that matter so is Bernanke.  They should be given rising domestic savings and falling business investment.


I am sure that by the end of the weekend, after extracting whatever he can from his G7 partners and China, Geithner will utter the dollar mantra.  But that will not represent a change in the rather obvious current policy of lower is better so long as it is orderly and a natural reflection of fundamentals in the near-term…call it benign neglect wrapped in a strong dollar mantra…possibly forever. 


Anyway I could not help but chuckle when it took Trichet to remind the press (and the rest of us) that the US believes in a strong dollar at a time when US officials can’t seem to come up with the words.  And I find it ironic that the great Trichet is far more interested in phasing out unconventional policy measures while accepting no responsibility that this may be tightening credit conditions and driving the euro higher…what is wrong with FX is usually a US problem and this time it is a Chinese problem and a US problem.


While I am at it, Trichet’s show of confidence is so Wizard-of-Oz and Greenspan-like that I get the chills every month when I watch his press conference on the ECB’s webcast.  He is almost giddy over the fact that the ECB never deployed QE (why do it if other c banks can do it for you…like EZ big banks don’t benefit from Fed and BOE QE?) and that any unconventional monetary policy measures it has deployed are merely a matter of technical adjustments for temporary problems in the banking system.  This presupposes that the financial crisis that crippled the US and UK economies and just about every other economy on the planet (financial system implosion brought down the real sector with a lag forcing huge policy response) never happened in Europe.  In other words in Europe there was never a spillover from the credit crisis (surely JC thinks this was a US export to Europe) to the real economy…two separate circles, worlds…this is so counter to every other thinking person’s assessment of the last 2 years that Trichet’s assertions are so outlandish they make me think of Soviet era group think and narrative writing unrelated to reality.  I don’t know his religion but if like most Frenchmen he is a catholic – if there is a freedom of information act in France or Brussels for the EU I want a record of his visits to the confessional. 


Smug too comes to mind as he routinely brags about the health of the banking system and the continued phasing out of nontraditional policy measures.  Soignée…banks asked for E69bln less in funds than the E225bln than expired last week.   What Trichet is not disclosing is the heap of unmarketable securities pledged to the ECB by the banks in exchange for funds. Any central banker that pretends the balance sheet is the Rock of Gibraltar when it is more akin to the iceberg the Titanic hit should be locked up.  So instead of being contrite for not having to conduct QE because the Fed and BOE did it for him and taking in the worst of securities by any central bank on the planet we have to suffer through a good hour of cockiness and arrogance.  It is shameful.  And he is so dismissive of reporters asking legitimate questions treating them as if they just arrived from preschool.  Duisenberg was real, courteous and somewhat humble.  It does not have to be this way.  If I were Bernanke or King I would send Trichet monthly free-rider bill to the tune of E5bln. 


Okay…now that I have that off my chest…back to the dollar.


Yes the USD (and most markets) corrected today…this rally in risk since August (USD decline) is stunning and overdue for some profit taking.  But to assert that it is over as markets have discounted Fed QE2 is almost as delusional as JC Trichet at the monthly press conferences since 2009.  How can markets discount something that is open-ended or extremely unknowable?   I have seen ranged of increasing the Fed’s balance sheet from $2.2trln now to as high as $5trln…but these are guesses.  If the economy continues to grow at a rate that will not reduce unemployment nor drive inflation up to 2% QE (2) could be around for years as opposed to quarters.  And if there is a double dip, it could get very big and in very short order.  So I think taking the QE side of the trade over the catalysts favoring risk-off like EZ sovereign debt strains or trade tensions makes sense and would use the latter to adding to risk longs (USD shorts). 


David Gilmore


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