New Dollar Policy?

[adios]

The business news media was all over the comments made by Treasury Secretary Snow regarding the "strong dollar" today. Basically I agree with Snow. What I find amazing is all the hoopla over his comments like the dollar depreciating against the euro for instance is something new. US short term rates are just out of out kilter with many foreign rates.

[Wildbill]

If I were him I would be silent on the issue. BOJ are the masters at manipulating the market. By stating what you think is obvious, they still take away a very key weapon in this. While a slow drop in the dollar might be welcome, I think the point where you want it to stop and re-evaluate is fairly close right now. The issue to me isn't trade, but the point where the world's cen-banks decide to dump the dollar for more euros to hold. Its already started, but if the US won't defend its currency then a lot of others will join in and that is indeed a bad scenario. Currency that flows for economic reasons is good, it means there are transactions involved that eventually will lead back to the US. Money taken for a rainy day and stored on the a cen-bank computer is terrible, that is unproductive capital and a run on that could be disaster. I think most cen-banks are fairly conscious of the potential for problems, but nonetheless I think many of them are slowly making some change.

What works best for a man in his position is very terse and cryptic statements. What you want to do is put currency traders on edge, keep them from making the Euro-Dollar a one way bet. Right now you can buy Euros and feel like you have very little risk of losing money. Enough people do that and its a rout. What has kept the Yen from moving so much is the implicit risk that is the Bank of Japan entering the market. While the Fed and the Treasury have seemingly taken this move off their plate for quite a few years except for planned moves in concert with others, this is a spot where a good banker puts his foot down and says "look, we are going to let the market go its way to a degree, but we aren't going to risk worldwide stability based on hedge fund bets, keep pounding that Euro at your own risk." The US could flood the market so fast and cause so many covered bets that the Euro could come back to parity rather quickly. Obviously that isn't our wish, but at some point we really do need to reinstate that possibility. Then again this administration is full of people that just do stupid things. They ignore strategy, they ignore implicit threats, they just say we are bigger than you and we are going to run you over. That might work going after many armies, but it doesn't work on the financial markets if done in that way. The financial markets are going to lose respect for the US if Snow and his boys don't get their act in gear because right now he shows no ability to manage this situation, something that is his main policy job for the moment.

[AceHigh]

Well said. While sometimes a dropping dollar can be good, it can easily turn bad. And it's a lot more likely to be very bad, than very good. That's why I'm surprised Snow would talk like it's a good thing.

Don't you think it's a little scary that we just won a war, Germany's economy really sucks and the euro is getting stronger against the dollar? That seems like a real bad sign to me.

[Wildbill]

I do have to admit the timing seems strange, but the world has been talking about the valuation for years. My question though is it really enough to turn around the deficit? I think the dollar deficit is to be expected, but not at over 5% levels. I think a natural 3-4% deficit can be considered normal due to the large differential in trade rules with the US being about the most open to foreign trade of any nation. While a lot of people want to make this out to be bad or a weakness, they are seriously misguided in my opinion. In this case I think that trade differences are still large and I suspect that the dollar's fall will just create the demand for more barriers worldwide. I get a sense Treasury hasn't really accounted for this. Its under 18 months to a Presidential vote and this is insurance for a seemingly locked up re-election campaign. The Bushies are taking no chances and this is merely a giveaway to the manufacturing states and big labor. That is the problem with politics today. Its not even about pleasing the most money given or the most votes, its about finding a key battleground target and then pounding on it. Utah will see little of Republican money related to the campaign because the state is in the bag for Bush, but is that right? Politics hasn't even become about who are your best supporters, its about getting as close to the middle as you can and stealing that vote, a voter who may never care for you or vote for you again.

[adios]

EU monetary policy is simply much tighter than Fed policy right now as reflected in key interest rates and the yield curve. Here is a comparison of the key rates:

EU overnight deposit rate 2.56% Fed Funds rate 1.25%

EU 3 month deposit rate 2.54% 3 month T-Bill rate 0.96%

EU 6 month deposit 2.47% 6 month T-Bill rate 1.00%

EU 2 year government bond 2.59% 2 year treasury bond 1.33%

EU 5 year government bond 3.38% 5 year treasury bond 2.30%

EU 10 year government bond 4.23% 10 year treasury bond 3.32%

EU short term interest rates are MUCH higher than US short term interest rates. The EU also has a somewhat flatter yield curve.

[AceHigh]

Something else, since the euro is a conglomeration of countries, it's less likely to be manipulated like the dollar.

[Wildbill]

I doubt that, the Euro's policy makers are generally oblivious to the individual members. Most have clamored for lower rates, even those for which the rates make sense, countries such as Spain and Ireland, there is no real opposition to a lowering of rates. These other countries are the ones keeping interest rates for the zone over 2% and hence forcing the ECB to stand pat in order to follow its mandate. As a whole I don't think there is a big difference in its ability to be manipulated. However I think there are inherently difficult circumstances with a Euro system that will make it difficult to keep consensus and avoid big fights over policy. Right now everyone plays nice because now is definitely not the time to be bickering publicly as the Euro tries to gain confidence on a worldwide stage. In 5 years check back, there could be a lot of nasty fights and the preludes are the flaunting of the 3% budget limits by its major powers.

Just remember the biggest problem with the euro-zone is this false belief it will create a competitive market like the US. This just isn't true. If you or I wanted had trouble finding a job there are 49 other states and a multitude of big cities to choose from, we can tailor ourselves to the market we think offers us the best choices. Even more so, we can do that if we are entrepreneurs, looking for the best markets in many factors that will help us get the best possible chances for success. Now say you live in Portugal. Maybe you learned some English in school, but it will never be as fluent as Portuguese. You learned different customs than an Irishman, your tastes are different, everything is just so different except for the money in your bank account. You are free to get on a plane and try living there, but its going to be quite tough going. Even if our parts of the country can seem very different, the chances of successfully integrating someone from LA into Alabama are a lot better than going from Lisbon to Dublin. That is the fallacy of the EU. Add to it the national pride issues, the fact that every country wants to save its national industries and keept its identity just makes this such a difficult undertaking and I think in general will lead to long-term weakness in currency.

[GeorgeF]

"I doubt that, the Euro's policy makers are generally oblivious to the individual members. Most have clamored for lower rates, even those for which the rates make sense, countries such as Spain and Ireland, there is no real opposition to a lowering of rates. "

The thing US oriented commentators do not look at is European expansion. Europe is adding countries like Bulgaria. It's like the US made Equador the 51st state. Europe does not need to cut rates to expand money supply, they just need to add undeveloped countries like Bulgaria.

I also think that the current US fed actions are acts of deperacy before an election.

[Wildbill]

Well people would call us crazy and foolish if we added Mexico and its about as well off as the additions to the EU. Those are excellent points George. The EU will definitely see some little growth spurt in 2004, but its going to be almost moot if Germany and France are suffering. In fact it could be disaster if the two big guns in the monetary union are blowing off the rules and daring all the little guys to do something about it when the world will recognize that the governments are so politically handicapped. I hate to be so negative, but the whole concept of the EU just gets less and less workable to me. These guys are going to be struggling until about 2015 with these issues and frankly the people of all the countries just don't look that willing to give into the realities they face. Germans don't care that Irish or Spaniards living standards have shot through the roof and they now can afford to buy their products and grow the EU as a whole. All they care about is that they used to have a rich country that had true world power and was a role model for many, and now its just a pawn in a group of many with no real way to make a noticable difference on the world stage. In my mind this was at the root of their whole opposition to the war. Asking them to take sacrifices so that a bunch of new members can be success stories like Portugal is just not going to go well, no doubt about that.

I find the administration always is pandering and I suppose with election coming up in little over a year its just going to get worse. While I don't have strong feelings one way or the other about this administration, I do have to say that there never was a better time for a third party to make inroads. These guys on both sides are so weak that I bet if the Reform party chose now to get up and running you might see something with legs. The endless stream of miserable advice W gets only challenged by a directionless opposition looks like a spot where a middle ground party could really eat up the suburbanites and even a lot of the fair-minded rich that don't try to get all their power by buying it off.

[AceHigh]

Here is a column that echoes your sentiments on the Euro. He predicts the EU will not exist in 25 years and details how it's tight monetary policy is hurting Germany.

http://cbs.marketwatch.com/news/story.asp?guid={8058FD0D-0B73-4C35-A438-6DAD4072B778}&siteid=mktw&dist=&archive=true