Wednesday, March 25, 2009

Geithner's Comments Are Moving The Currency Markets

Timothy Geithner should quickly learn that currency traders take everything he says literally. Recent comments he made caused the dollar to take a nose dive. Geithner quickly followed those comments up with a retraction of sort, which left the markets unsure of his true intent. Currency expert Kathy Lien address this matter further in her blog post below.

How long will it take for Treasury Secretary Tim Geithner to realize that his comments move markets? When he first took office, he mistakenly threatened to brand China as a currency manipulator. This caused a wave of volatility in the currency market and sharp criticism about the experience of the new Administration. And now, Geithner has done it once again (Geithner Comments send Dollar for a Ride).

Even though President Obama said that the dollar is strong and there is no need for a reserve currency, Geithner suggested this morning that the U.S. is “quite open” to China’s suggestion of moving towards a Special Drawing Right (SDR) linked currency system. But just as quickly as he made those comments, he retracted them probably because an aide told him that the U.S. dollar is tanking. Minutes later, Geithner said there is “no change in dollar as world’s reserve currency and likely to remain so for long time.”

These contradictory statements are clearly the act of an amateur Treasury Secretary that is forced to eat his words.

Why has the dollar had such a big reaction to these comments? Because if the world adopts the SDR, which was created by the IMF as an international reserve asset, it would mean less demand for U.S. dollars.

source: eSignal

source: eSignal

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Anonymous said...

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Anonymous said...

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Andrew Bell said...

I'm not certain that your explanation of why the markets reacted to the comments with such alacrity are right on point. I see the situation more like what happened in the housing market and other late bubble assets. The market knows that the US $ is over valued and is just waiting to sell. At this point small comments set off big slides because it is what people expect to happen.

What doesn't make sense to me is why people insist on playing chicken with values. There seems to be some drive to hold an asset until the absolute peak to be able to say "I sold at exactly the right time."

This is mis-placed, the minimal gains that are achived by getting the peak of an asset exactly are much much less then the losses from being even seconds late on the sale.

My guess is that smart money has been out of the US$ for some time. Just look at all the different ways the Russians and the Chinese have been spending US$ reserves.