Treasury Secretary Timothy Geithner talks during an event at the Commonwealth Club in Palo Alto, California, October 18, 2010.
Credit: Reuters/Kim WhiteBy Emily Kaiser and Glenn SomervilleWASHINGTON | Tue Oct 19, 2010 3:45pm EDT
WASHINGTON (Reuters) - Treasury Secretary Timothy Geithner seems to be plotting a safe glide path for a dollar that investors widely expect may fall further despite Tuesday's bounce.
When he broke an eight-month silence on the dollar on Monday, Geithner stressed the need to maintain confidence in the currency, a sharp change from the well-worn Treasury mantra that a strong dollar is in the United States' best interest.
What Washington needs is a dollar weak enough that exports get a lift to help keep a wobbly economic recovery on track, but not so weak that creditors flee.
"He is pulling the rip cord on one of a series of parachutes for the dollar," said David Gilmore, a partner at Foreign Exchange Analytics in Essex, Connecticut.
As long as the Federal Reserve is printing money to try to energize the economic recovery, investors will take that as a signal to sell dollars. The Fed is widely expected to announce its next round of asset purchases in November.
The central bank's so-called quantitative easing "represents the gravitational pull of the earth and there is nothing to prevent the dollar falling," Gilmore said.
From Washington's point of view, the Fed's stimulus is needed medicine not only for the U.S. economy, but for the world at large. If the U.S. recovery goes off the rails, the global economy will suffer as well.
But a dollar crash is in no one's interest.
That's where Geithner's confidence comment comes in. As long as the world has trust in the dollar over the long haul, the United States can avoid some of the unpleasant side effects of a weakening currency -- namely high imported inflation and a rush to dump Treasury debt and other dollar-denominated assets.
China's surprise rate hike on Tuesday, which came just hours after Geithner's dollar comments, provided an early test of investor confidence.
The dollar, which hit a 10-month low against major currencies on Friday, was up 1.7 pct late Tuesday in New York, its biggest one-day jump in three months, as it drew safe-haven investors worried China's move would slow global economic growth.
PERFECT TIMING?
The timing of China's announcement sparked rumors that Beijing and Washington may be nearing some sort of accord on how to realign their currencies before a Group of 20 summit in Seoul, Korea next month.
Higher interest rates in China could pull in more capital and lead to greater upward pressure on the yuan, which Beijing has been allowing to rise slowly.
"I can't help but conclude that all of these events are connected ... not planned in mutual fashion but indeed representing a real attempt by the U.S. and China to tamp down currency tensions ahead of G20," Gilmore said. "I call it dollar detente."
