New currency market rig tops finance ministers' agenda


Paulson Boxed In By 'Strong-Dollar' Chant

By Christopher Anstey and Kevin Carmichael
Bloomberg News Service
Tuesday, November 13, 2007

As U.S. Treasury Secretary Henry Paulson prepares to meet counterparts representing the world's biggest economies, he carries some extra baggage on the plane to Africa.

It's the 13-year-old "strong" dollar mantra.

Paulson, like his four predecessors, has stuck with former Treasury chief Robert E. Rubin's phrase that a "strong" dollar is in the U.S. interest. Officials repeated the phrase whether the dollar was rising or falling. Now, Paulson is under pressure from European policy makers to more forcefully defend the currency after it fell to a record low last week.

"It's increasingly urgent that the U.S. bolsters its rhetorical position," said Ernest-Antoine Seilliere, president of BusinessEurope, the European Union's employers' federation. Paulson should avoid a "collapse of the U.S. dollar," he said.

One option may be to express confidence the currency will retain its dominance in central-bank reserves and, as Paulson did last week, predict stronger American growth, analysts said.

That strategy may meet with limited success because the Federal Reserve is cutting interest rates while banks in Europe and Asia are either tightening or keeping them unchanged. Moreover, words may carry little weight in a market that's swollen to $3.2 trillion a day.

Paulson, 61, departs today for a six-day trip to Africa that features a gathering of finance ministers and central bankers from the Group of 20 near Cape Town. The G-20 groups the largest developed countries, including the U.S. and Germany, with emerging markets such as China and India.

...Top of Agenda

Currencies, oil prices, and inflation will top the G-20's agenda, South African central bank Governor Tito Mboweni told reporters on Nov. 8.

Japanese Prime Minister Yasuo Fukuda said in an interview with the Financial Times published today that the yen's gains aren't desirable and warned traders not to make speculative bets on the currency.

Canadian Finance Minister Jim Flaherty will tell his counterparts that Canada is bearing a disproportionate share of the drop in the dollar and will ask China and other nations to accept more of the burden, one of his aides told reporters today in Ottawa on condition of anonymity.

...Message for China

European finance ministers gathered today in Brussels and telegraphed a similar message on China. Luxembourg Finance Minister Jean-Claude Juncker also said "recent sharp moves in exchange rates are unwelcome," referring to the euro's climb.

European Central Bank President Jean-Claude Trichet has revived rhetoric blasting excessive moves in the euro. He said at a Frankfurt press conference last week that "brutal" fluctuations are "never welcome," emulating language used when the euro soared in 2004.

Trichet typically reiterates comments from Group of Seven statements when asked about exchange rates. When he veers from that line, traders and counterparts can quickly grasp his message.

The euro climbed to $1.4752 on Nov. 9, the strongest since its 1999 debut. The currency has appreciated 11 percent since the start of 2007 and 45 percent in the past five years. It traded at $1.4616 at 10:14 a.m. in New York.


"The Europeans will be frustrated," said Peter Dixon, an economist in London at Commerzbank AG, Germany's second-biggest bank. "European competitiveness and profitability are going to be badly damaged."

Paulson doesn't have Trichet's flexibility to express concern at the speed of the dollar's move, analysts said. Any substantive change from the "strong dollar" phrase raises risks that the shift could send it plunging.

When Paul O'Neill, President George W. Bush's first Treasury secretary, told a German newspaper that "we don't follow, as is often said, a policy of a strong dollar," the U.S. currency slid 1 percent versus the euro. He later clarified that he did favor a "strong" dollar.

O'Neill's successor, John Snow, added a phrase that the Bush administration also believes exchange rates ought to be set freely in open markets, based on fundamentals.

Paulson on two occasions last week added his own words to his support for a strong dollar and market-set exchange rates based on fundamentals. On Nov. 8, he said that the U.S. "will continue to grow" and expressed optimism that officials' commitment to growth will inspire "confidence in our economy."

A day later, he told reporters "The dollar has been the world's reserve currency since World War II and there's a reason."

...'Marginal Change'

"It was a marginal change," said Sophia Drossos, a currency strategist in New York at Morgan Stanley, who used to help manage the Fed's currency reserves. "He didn't have to point those things out if he didn't want to. It was a way to show he's not asleep at the wheel."

While a weakening dollar has helped sustain U.S. growth through the worst housing recession since 1991, analysts said there are reasons for Americans to favor a stronger currency, similar to the time of the 1994-1995 birth of the strong-dollar policy.


The falling currency threatens to stoke inflation at a time when the Fed has been lowering interest rates to buttress growth. Chairman Ben S. Bernanke said last week the Fed will ensure the weaker dollar doesn't feed through to broader prices. There are also questions about the dollar's status as the dominant reserve currency.

"It appears that the U.S. Treasury has consistently moved" in the direction of resurrecting the original attributes of a strong-dollar policy, said Thomas Stolper, an economist at Goldman Sachs Group Inc. in London.

Still, any shifts in language may have limited impact on exchange rates, particularly because the dollar is losing its yield premium as the Fed cuts interest rates, analysts said.

Traders now buy and sell an average of $3.2 trillion a day in the foreign-exchange market, compared with $718 billion in 1989, Bank for International Settlements figures show.

* * *

Join GATA here:

Vancouver Resource Investment Conference
Sunday-Monday, January 20-21,2008
Vancouver, British Columbia, Canada

* * *

Help Keep GATA Going

GATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at

GATA is grateful for financial contributions, which are federally tax-deductible in the United States.