Dow Jones Reprints: This copy is for your personal, non-commerical use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, use the Order Reprints tool on any article or visit www.djreprints.com
HOW DO YOU KNOW IF A TREASURY SECRETARY is lying when he talks about wanting a strong dollar? If his lips move.
Okay, it's an old lawyer joke, but the mantra that a strong dollar being in America's interest has lost any meaning it was first uttered by Bob Rubin during the Clinton Administration. Though it was reiterated endlessly but without much feeling by Bush II-era Treasury Secretaries, the U.S. Dollar Index has lost more than a third of its value since its high in 2001.
And the slide has continued during the Obama Administration, with the dollar index down a disquieting 16% since its most recent peak in March, when the global flight to safety reverted to a rush to risky assets.
Given that record, it's easy to be cynical Treasury Secretary Timothy Geithner's declaration Thursday that "it's very important to the United States that we have a strong dollar."
But here's a switch: the market appears to be in agreement as the dollar shows signs of bottoming out, though it has nothing to do with the solemn pronouncement from Geithner.
The widespread suspicion both in the U.S. and abroad is precisely the opposite, that the Obama Administration doesn't just treat the dollar's decline with benign neglect; but it actually favors a steady but controlled devaluation to stimulate exports, a rare bright spot in the U.S. economy beset by weak domestic demand and double-digit unemployment.
Indeed, based on the U.S. record since it cut the dollar's last tie to gold in August 1971, it's difficult for the world to forget the cynical retort at the time from President Nixon's Treasury Secretary, John Connolly: "It's our currency but your problem." America has exploited its unique status since then as the provider of the world's reserve currency to live beyond its means.
The rest of the world has a very different view, says Mohamed El-Erian, the chief executive and co-chief investment officer of Pimco, the world's biggest bond manager. The U.S. is viewed abroad as the core of the system, he adds, and the dollar is a "public good" that is relied upon everywhere.
By providing a reliable reserve currency, the deepest and most liquid financial markets and government debt of unquestioned triple-A quality, in return the U.S. gets to borrow cheaply and obtain goods from around the world in exchange for its paper, El-Erian explains in an interview in Pimco's Newport Beach, Calif., headquarters.
As Obama heads to Asia to meet with the region's leaders, the role of the U.S. dollar has been questioned as never before, notably by China, which has called for a supranational reserve currency to supplement and perhaps supplant the dollar. At the same time, China has maintained virtually a fixed peg versus the dollar for the past year-and-a-half, which means its currency, the renminbi, has fallen in tandem with the greenback.
There may be signs that the decline in the dollar (and by extension, the renminbi) has gone too far. Though the stock and commodity markets rise with each downtick in the dollar, the decline threatens to become destabilizing. India's purchase of 200 tons of gold last week from the International Monetary Fund was a loud vote of no-confidence in the dollar and other paper currencies.
Various central banks in Asia have been reported to be intervening to prop up the dollar. And, as noted in this space Thursday ("Good News and Bad News in China's Currency Shift," Nov. 12.)China's monetary authorities hinted it may permit appreciation of the RMB. That could stave off protectionist pressures as it could be timed to coincide with Obama's visit. And it would help defuse tensions with Asian countries that have seen an erosion in their export competitiveness as their currencies rise relative to the dollar and, in turn, versus the RMB.
There's no reason to think that a bunch of finance ministers and central bankers can somehow control the foreign-exchange markets where trillions of dollars' worth of currencies change hands daily. But the charts seem to suggest the dollar is close to making a bottom.
Veteran technical analyst Martin Pring sees signs the Dollar Index may be on the verge of a rebound. In his weekly note to subscribers, Pring says the dollar has the potential to rally as it is "challenging" its downward sloping trend line while its rate of change is turning positive. At the same time, however, there also is a potential for the Dollar Index to break down as it has been moving in an ever-narrowing channel.
"The battle lines then, are at 77 on the upside and 74.4 on the downside," Pring writes. The Dollar Index, which measures the greenback's value against six currencies -- the euro, the pound, the Swiss franc, the Swedish knona, the Japanese yen and the Canadian dollar -- closed up Thursday at 75.596 and above its 15-month low of 74.774.
And as the dollar firmed, commodities such as crude oil and gold backed off and stocks eased Thursday. Not much should be read into a single day's action, but signs of a change in the weak-dollar-inspired rally in risk assets should be watched carefully.
Comments: randall.forsyth@barrons.com
This copy is for your personal, non-commerical use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com
Yahoo! Buzz
MySpace
Digg
del.icio.us
NewsVine
StumbleUpon
Mixx
Canaccord Adams says that networking M&A could tail off from here.
Canaccord Adams says that networking M&A could tail off from here.
Credit Suisse says Disney isn't overpaying for the acquisition.
Shares of the navigation-device maker have been hit hard by fears of new competition. Here's why there's still life left in the GPS leader's stock. Video: Time to Reroute Garmin Shares
Chase Carey sold 330,000 shares of the satellite-TV provider.
The department store operator offered a turkey of a forecast for the fourth quarter. Though the stock is down on the news, there's little reason to buy.
Ticonderoga Securities suggested caution on the LCD supply chain.
Morgan Keegan suggests several alternatives in the regional-bank sector.
Fox-Pitt says lending standards are easing but remain historically elevated.
Research suggests professional advice on mutual funds can be costly. (At SmartMoney.com)
Apollo Group and other for-profit colleges will find it harder to make the grade -- especially as they come under scrutiny for aggressive enrollment practices.
The real secret of Corporate America's profit and productivity miracle.
AN INTERVIEW WITH BRIAN C. PFEIFLER: Rated best among financial advisors last year, he sees opportunities among high-quality stocks and bonds.
L-3 could rally more than 30% in the next year amid rising demand for its communications, intelligence, surveillance and other defense systems. How asymmetrical warfare plays into the contractor's strengths.
Look for Sherwin-Williams to paint the town red once the economic recovery kicks into high gear. With innovative products, this well-run company continues to take market share from rivals.
A growing fear of inflation.
Mixed data leave some investors wary -- yet indexes manage to reverse two weeks' decline.
Leaner and meaner drug-distributor Cardinal health is positioned for growth. But few on Wall Street recognize its full potential -- yet.
For quality, look to laggards.
A short seller sounds an alarm over states' deficits -- and bonds. Muni managers demur.
The right recipe for rates.
Read Full Article »