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Dollar May Fall After G-20 Pulls Safety Net Away

Monday, 25 October 2010 08:25 AM Current | Bio | Archive

After the two-day meeting of the Group of 20 finance ministers and central bank chiefs in South Korea that ended on Saturday, U.S. Treasury Secretary Geithner issued a very important statement.

Here are some excerpts: “… Changes by surplus economies, both emerging and advanced, need to be complemented by reforms in countries like the United States to increase savings — including restoring fiscal sustainability — to shift growth from consumption to investment and to exports … We have agreed to cooperate more closely on exchange rate policy. Countries with significantly undervalued exchange rates committed to move toward more market-determined exchange-rate systems that reflect economic fundamentals, as China is now doing … The countries responsible for the dollar, euro and yen recognized the importance of preserving stability among the major currencies and avoiding excess volatility and disorderly exchange rate movements. We all committed to refrain from competitive devaluation or undervaluation … the adjustments now under way will happen…”

By the way, the Geithner is scheduled to have a meeting tomorrow in Qingdao, China, with the Chinese Vice Premier Wang Qishan, who is the designated special representative of the Chinese leadership on U.S.-China economic issues, where they will discuss what is called “important bilateral economic matters.”

Some comments by key Finance and Economy Ministers were also noteworthy.

First, there was the Brazilian Finance Minister Guido Mantega commenting on the telephone conversation he had with Treasury Secretary Geithner ahead of the meeting. “He told me that he doesn’t intend to allow a devaluation of the dollar … he assured me that the policy is not to weaken the dollar but on the contrary, to strengthen it.”

Secondly, Japanese Finance Minister Yoshihiko Noda explained his understanding of the G-20's pledge that advanced economies “will be vigilant against excess volatility and disorderly movements in exchange rates … I think being ‘vigilant,’ is not just saying excessive movements are undesirable as in the previous G-20 statement, means that we will be watching market developments and conducting appropriate coordination when necessary. We were able to share the awareness and I believe it is a step forward.”

Very importantly, the Japanese Finance Minister added that coordinated action wouldn’t be limited to currency intervention.

Regarding the Japanese yen he stated: “I have always expressed my view that while deflation continues and the economic climate remains severe, a prolonged appreciation of the Japanese yen would not be good, and that excessive movements would have a negative impact. From the viewpoint of suppressing excessive fluctuations, we intervened last time. And our stance that we will take appropriate, firm action when necessary has not changed.”

Thirdly, the German Economy Minister, Rainer Brüderle publicly criticized U.S. policy, hereby suggesting tensions will remain for the time being, when he said: “Excessive, permanent money creation in my opinion is an indirect manipulation of an exchange rate.”

And finally, yes, Geithner stated once again: “The policy of the United States is to support a strong dollar.”

So, after all that and much more being said in Korea while apparently very little being achieved over the last couple of days at the G-20 meeting in Korea, it will be nothing more than understandable that investors will both question the failure to agree on “specific” targets for surpluses and deficits as well as the “robustness” of the accord over currencies.

Therefore, I think we could see a re-testing of the downside for the dollar.

Nevertheless, in my opinion, both the final G-20 statement itself and the comments of Geithner as well as of Japanese Finance Minister Noda suggest a very real shift has taken place in attitudes towards currency policy coordination.

Let me explain: Firstly, over the last couple of days we have seen the re-emergence of “strong dollar” policy statements that sound rather close to those of the Clinton era than those of the past decade.

Secondly, the change in the wording from the previous G-7 communiqué compared to this one makes it clear that, even if it wasn’t intended to do that, the U.S. is being pulled away from its old policy of “benign neglect” towards the dollar by giving it an explicit responsibility to be “vigilant against excess volatility and disorderly movements in exchange rates.”

And finally, Japanese Finance Minister Noda made it clear that such support would include “multilateral intervention.” Yes, investors have been warned.

In other words, we are back to the pre-1995 world. Let me put it a little more understandable: It seems to me that the world is about to ask the U.S. to put its money where its mouth is.

Therefore, investors shouldn’t be surprised when we’ll finally see the U.S. response; there is no doubt in my mind, it will be a robust one.

There is simply too much at stake for the U.S. and everybody else.

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After the two-day meeting of the Group of 20 finance ministers and central bank chiefs in South Korea that ended on Saturday, U.S. Treasury Secretary Geithner issued a very importantstatement. Here are some excerpts: … Changes by surplus economies, both emerging...
Monday, 25 October 2010 08:25 AM
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