Probably one of the longest running jokes in the financial markets is the amount of time U.S. officials spend talking about their support for a strong dollar while taking no action to actually support a stronger currency.
On Monday, Federal Reserve Chairman Ben Bernanke made a rare contribution to the bluster by stating his own support for the dollar (note that it is fairly common for other central bankers to issue commentary on their respective currencies; for example, the Bank of England, the European Central Bank, the Reserve Bank of Australia, and the Bank of Canada):
“We are attentive to the implications of changes in the value of the dollar and will continue to formulate policy to guard against risks to our dual mandate to foster both maximum employment and price stability. Our commitment to our dual objectives, together with the underlying strengths of the U.S. economy, will help ensure that the dollar is strong and a source of global financial stability.”
Unfortunately, Bernanke provided no details on what policies the Federal Reserve might have in mind. Given the dollar has been in decline for almost nine years, we already know that execution of the dual mandate combined with “underlying strengths” are not quite sufficient conditions for supporting the currency. Since the Fed can only operate in support of its dual mandate (for now anyway), Bernanke’s statement just adds more hot air to an already heated room. Currency traders responded quickly by sending the dollar higher against all major currencies. By the end of the U.S. trading session, most of these gains were promptly rolled back. Look for currency traders to continue to pressure the dollar until someone or something forces them to act any differently.
Financial markets have also witnessed an on-going parade of U.S. Treasury Secretaries who talk up a strong dollar while doing little to nothing in support of the currency. Current Treasury Secretary Timothy Geithner supplied one of the funnier claims of support I have seen in a while. Geithner invoked his “feelings.” From Bloomberg:
“‘I believe deeply that it’s very important to the United States, to the economic health of the United States, that we maintain a strong dollar'”
Geithner goes on to claim that “…U.S. efforts to boost exports aren’t in conflict with the ‘strong-dollar’ policy. I don’t think there’s any contradiction between the policies’.” I would love more details because every other banker outside of the U.S. extols the virtues of a weaker currency as a support for exports. For example, in October’s interest rate decision, the Bank of Canada acknowledged that a strong currency means that “..the composition of aggregate demand will shift further towards final domestic demand and away from net exports.” As another example, last week, Bank of England Governor Mervyn King stated in his introduction to the “The Inflation Report” that:
“This process of balance sheet adjustment implies the need for the UK economy to rebalance away from private and public consumption towards higher net exports. The fall in the exchange rate over the past two years will help to smooth that process.”
Just two weeks ago, head of the White House Economic Recovery Advisory Board Paul Volcker sang a similar tune about the need for reducing consumption and increasing exports:
“…his meeting on Monday with President Barack Obama focused in part on reducing U.S. economic reliance on consumer spending. The alternatives to help bolster future economic growth include boosting exports, applying innovative technology to green issues and improving the nation’s infrastructure…Obama understands that ‘We cannot have so much consumption.’ Consumer spending accounted for 70 percent of the U.S. economy before last year’s economic meltdown, a level that Volcker said was sustained only by “‘the magic of financial engineering.'”
Regardless, despite all the talk, the U.S. continues to allow the dollar to sink, and our trading partners are getting increasingly impatient – especially given the near universal desire to boost exports. The latest complaints come out of the eurozone where companies fret that the appreciating euro will hinder revenue growth. The Financial Times offers the European Aeronautic Defence and Space Company (EADS) as one of the starkest examples of how the appreciating currency is hurting profits and revenues in Europe:
“…EADS, the aerospace group,…said currency movements had cost it €1.1bn in the first nine months of this year. Hans Peter Ring, finance director, said the ‘prolonged weakness of the dollar remained one of the biggest challenges to profitability’.”
ING equity strategist Gareth Williams adds:
“The strong euro is exerting a lot of pressure and causing some competitive problems for European companies against American ones and the pressure will continue to mount…The export-based recovery is threatened. Cyclical companies, such as chemicals and industrial goods have done particularly poorly.”
The strategy of all talk and no action is likely to continue for quite some time. The Federal Reserve continues to reassure markets that nominal interest rates will remain essentially zero in the U.S. well into 2010. Geithner asks for patience as the U.S. pledges “…to bring our fiscal position back to a sustainable balance” only after the economic recovery strengthens. With the Congressional Budget Office and the IMF projecting year-over-year 2010 U.S. GDP growth around 1.5%, the time for action is not around the corner. (Click here for CBO report; click here for IMF report).
(On a related sidenote, a reader recently introduced me to Triffin’s Dilemma. I am fascinated and intrigued by its claim that a reserve currency is doomed to deteriorate over time.)
Be careful out there!
Full disclosure: no positions.