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Geithner Strains Imagination on USD Weakness. China Defies Reason on CNY (FXA)

Geithner Strains Imagination on USD Weakness.  China Defies Reason on CNY.


I cringed today when Geithner was interviewed by CNBC’s Liesman and when asked about charges from none less than Greenspan that the US is pursuing a weak dollar policy, the Treasury Secretary not just denied this (nothing new here) but said the recent weakness in the dollar reflected the unwinding of safe-haven demand for USD from the crisis.  In other words the weaker dollar is a reflection of a normalization of financial market conditions and has nothing to do with QE2. 


You have got to be kidding.  The USD decline can be timed to near the day the Fed sent up the first trial balloon on QE2 back in August…some point to Bernanke’s speech at Jackson Hole, but there were other indicators out earlier (like reinvesting proceeds from maturing and prepayments on mortgages into US Treasuries).  


What was very clear was the absence of any real protest over the recent decline of the USD.  Okay the USD has moved from 1.41 to 1.36 roughly in the last five trading sessions so some of the urgency to address the weak dollar is absent compared with a week ago.  But even in the midst of the post QE2 slide to new lows for the USD, Geithner was silent.   What else is he to do when his boss President Obama pledged to double US exports over a five year period?   The new de facto mantra is a weak dollar is in US interest so long as it does not turn into a run.  All the US wants is what Australia has, but instead of in base metal exports, the US hopes to export more grains, processed food products (whole chickens not just feet), consumer electronics, Hollywood movies, US higher education, investment banking and high tech goods from the civilian sector and not defense.    


Despite taking a very uncharacteristic (for a retired Fed Chairman) cheap shot at Bernanke, Greenspan had it right in the FT today…the US has a de facto weak dollar policy and it is implicitly embraced at both the Fed and US Treasury.  Bernanke at Jekyll Island at the weekend said the best thing for the world economy is to have the US growing more and that once that happens the dollar will reflect it.  In other words it is the Malcolm X approach “by any means necessary.” 


Frankly I don’t have a problem with a weak dollar policy.  I do have a problem with pretending it is anything else and rewriting the narrative to explain why it is where it is. 


I do have a problem, a very big problem, with China.  No one makes China peg its currency to the dollar.  There is a major double standard here…pegging the yuan to the dollar to lock in exports to the US at artificially low levels (lock in profit margins more precisely)  which leaves China with a near $3trln pile of foreign reserves of which 60-70% are thought to be in dollars…hence the growing problem China has with the weak dollar.  China simply can’t have it both ways.  Moreover, China and other currency manipulators protecting mercantilist economies are increasingly the largest sellers of dollars as they attempt to diversify out of an ever larger USD exposure and weaker USD.   Reserve managers are not averaging down their USD position as much as they are averaging down FX losses.  No official at G20 who has a problem with China’s policies on the yuan is calling for an immediate float or 30% revaluation.  Yet China seems to describe all policy critics as doing just this.  I also find it incredibly disingenuous for China to compress yuan appreciation and major policy changes all into the weeks leading up to major multilateral and bilateral meetings.  If Geithner and G20 were really eager to get the yuan up faster simply schedule SED and or G20 meetings for every month. 


I also think there is a direct link to China for higher commodity prices and not simply because China’s more recent reserve currency of choice has been every commodity under the sun and under the earth.  If China is a net drag on US GDP via large bilateral trade deficit (indisputable) then it follows that changing this relationship will improve US GDP.  If QE2 puts pressure on China to revalue, open up and promote domestic demand, then China has only China to blame for not adjusting sooner.  And by forcing the Fed to break glass in an emergency and grab the QE2 axe then China is doubly guilty for driving up commodity prices.


One thing I can’t help but think is more than coincidences are the levels and changes in China’s massive currency intervention in recent years and the size of the Fed’s QE programs since the credit crisis.  China’s foreign reserves (mostly FX and some gold…not clear China has SDRs but will soon if not) at the end of September were $2.6trln of which and are up from about $2trln at the end of 2008 when the crisis hit.  The Fed’s balance sheet is now at $2.3trln and will in six months grow  to $2.9trln…I will bet my favorite fly rod that China foreign reserves will be around $2.9trln next June.   At the end of 2007 Fed balance sheet was around $900bln.  At the end of 2007 China’s reserves were around $1.5bln.   


China dollar and commodity hoarding is arguably the other side of the banks-gone-derivatives-wild-homeowners-gone-all-in-on-housing-leverage-ratings-agencies-gone-MIA-regulators-just-gone-to-lunch side of the coin.  Yes China helped get us here and must own up to its unsustainable policy mix and must start helping to get us out of here…this is where China hides behind the Great Wall. 


Lastly one of my favorite analysts of all things credit James Aitken today wrote in his NFSI that QE2 has proven to be the airbag in the EZ car wreck…I doubt he was ignoring the much welcomed slide in EURUSD by EZ officials, but was simply pointing out how much more of a run we would have seen in periphery debt and CDS if not for QE2 making Ireland the Lehman event to Greece as the Bear Stearns event.  Merkel should be praising Bernanke not burying him.


David Gilmore  




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