Medley On The Real Dollar Story

Tyler Durden's picture

Submitted by hedgeyourmind

G7: The Real Dollar Story

Forget Robert Fisk's latest anti-American fantasy about a "secret" deal to end dollar-priced oil in a loss-making British newspaper. For once, truth is more interesting than fiction. Behind the scenes at recent G20, G7 and IMF ministerial gatherings, a genuine and, until now, untold story of high politics and the US dollar has been taking shape.

Not since 2004 has European Central Bank President Jean-Claude Trichet been so relentlessly vocal in his calls for a "strong dollar," even intriguingly elaborating for the first time that global rebalancing via exchange rates should "not imply a change in the bilateral position of the dollar and the euro."

The Europeans are getting worried. As the euro flirts with the $1.50 level not seen since mid-2008, the Eurozone's economic and monetary authorities are mulling their first unequivocal verbal protest against the currency's appreciation in five years.

Why now? Because Eurozone officials have lost trust in the commitment of US President Barack Obama's administration to the "strong dollar" policy. This loss of trust has reached a point where some even suspect the US has reached an accommodation with the Chinese whereby Beijing turns a blind eye to dollar depreciation in return for a moratorium on Washington's public calls for renminbi appreciation.

A doubt is born

Underlying these suspicions are two factors: the illogic of recent currency trends, and the increasingly obvious signs of a burgeoning office romance between the US and China. The Eurozone followed the US into recession and their central banks respectively forecast zero and nearly 3% growth in their GDP next year. The Eurozone policy response also lagged, yet, since mid-June when huge demand for the ECB's first 12-month liquidity tender probably took rates to their cycle low, the trade-weighted euro has appreciated by nearly 5%. Over the same period, the renminbi has fallen 6% against the euro while pegged against the dollar.

Coincidentally, since US Treasury Secretary Tim Geithner's June visit to Chinese President Hu Jintao, Premier Wen Jiabao and Vice Premier Wang Qishan in Beijing, Europeans have detected a marked change in tone between the Americans and Chinese over a range of issues. Following further high-level bilateral meetings in July and September and Obama's decision to postpone a meeting  with the Dalai Lama, Europeans say they have never before seen such levels of Sino-US détente at the IMF meetings in Istanbul.

Even Geithner's three-time public commitments to a "strong dollar" since the Pittsburgh G20 September 24–25 have failed to win over suspicious Europeans. In their view, his firmer comments, in which he recognized how the dollar's "role in the system conveys special burdens and responsibilities on the US,"only came after much public prodding from Trichet and Eurogroup Chairman Jean-Claude Juncker.

Trend depreciation

What would justify this behavior, they ask? One explanation is a tacit Sino-American currency deal. In Europe, policymakers have long accepted the Americans won't be willing or politically able to shrink their twin deficits to sustainable levels only through boosting saving.

They have always believed the dollar would need to go through a trend depreciation. However, this should not happen disproportionately at the expense of Eurozone exporters, nor should it be a substitute for US structural adjustment.

As they grow increasingly skeptical about the political will to make these structural changes, Europeans are starting to conclude the administration—or at least parts of it—are trying to manage the dollar lower and have accepted the renminbi will go with it at least in the short term.

Indications from Beijing and Washington are that the Europeans are reading too much into their improved relationship. Not only has Geithner recommitted publicly to the "strong dollar" and renminbi appreciation over time, they say, but the Istanbul G7 communiqué notes China's "continued commitment to move to a more flexible exchange rate, which should lead to continued appreciation of the Renminbi in effective terms." The Chinese say they haven't changed their fundamental concerns about a US fiscal turnaround.

So far, the Europeans are not pacified. They want to be convinced of paranoia rather than justification, which is the reason they have not already gone beyond Trichet's careful reminders of the public commitments of Obama and Geithner to a "strong dollar" and calls on Asian authorities to share the dollar-adjustment burden with the Eurozone.

But both Washington and Beijing are running out of time if they want to avoid the emergence onto the world stage of yet another central bank with an exchange-rate objective.

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Project Mayhem's picture

let the currency wars begin

Divided States of America's picture

Yeah its beginning alright but from past history of this sort, nothing gets done until too much damage and strain has already been built up. This could take years before anybody does anything. And by that time, the elite will have had made enough money to move to the moon after making it inhabitable while we are left with a dying planet ravaged by wars and with no resources or food left.

ghostfaceinvestah's picture

This time the Euro elites are battling the US and Chinese elites.

ghostfaceinvestah's picture

Yup, with fiat currencies backed by nothing, you knew this was inevitable.

ZerOhead's picture

Timmy lips speak of a strong dollar... but his eyes say otherwise.

I guess we'll just continue to let the dollar fall and the Europeans will issue all their new debt in US dollar denominations.

Classic Mexican standoff... grab some popcorn... this could get interesting.

TumblingDice's picture

That seems to be the logical play... to hedge, but what is the next play then...peg the

Bonesetter Brown's picture

Let's wait until after the Chinese have finished rotating out of MBS and into Treasuries.  Then let's check U.S./Sino alignment again when the subsequent round of QE is announced.  Don't know if we will be on QE v2.0 or v3.0 by that time...

Gilgamesh's picture

Australia is doing a fine job of speeding up the timetable on all this.  They are almost single-handedly taking down the USD every night with their econ numbers.  Just released 5.7% unemployment (+40k jobs) vs. 6% est.  Boy, could you imagine having a country rich in natural resources and a trading partner on a binge for those assets during these tough economic times?  Oh yes, that would require allowing mining to flourish instead of trying to kill it off.  I'm sure it's all for the best, though.


-Silver breaking to yearly highs finally.

Ducky's picture

This kind of points out the paradox of wanting the euro to replace the dollar as a reserve currency and wanting to be a strong exporting region. Does the eurozone really want everyone to flee to the euro instead of the dollar when things get rough? Not the French.

AxiosAdv's picture

The Euros are desperate to push the EUR down around the 1.20-1.25 level.  It's killing Germany.  The bad thing is that things in Europe are as bad or worse than they are in the US and their banks are in much worse shape, which is really saying something.  

serendipitous_one's picture

Agree that the strong Euro is killing Germany from an export standpoint, but not so sure I agree that the state of their banks being worse than those in the US.  They may very well be unhealthy, but only to the extent of their participation in the toxic derivative markets.  Where they are much better off is in not having gone through a huge residential real estate bubble, and not having a standard 30 year mortgage that lenders could game the way they did here in the US.  I have homes in both countries, and know for a fact that you couldn't go to the local bank in Germany and get a 125% loan to value mortgage, much less one that did not require a credit check and verification of income.  So while the German banks may be choking on our toxic mortgage backed securities, at least they're not choking on their own as well, and more to the point, they aren't facing the huge numbers of foreclosures and write downs on the mortgages they wrote...they actually have some solid assets on their books with cashflow that can somewhat be relied least until their unemployment goes parabolic. :)

Anonymous's picture

But, the Europeans, particularly banks in Austria, Denmark, and Italy are hurting from the implosion of real estate prices in eastern Europe, which is several orders of magnitude more severe than the real estate collapse in the U.S.A. They are also suffering a bigger real estate collapse in Spain than in the USA (percentage wise), and to a lesser extent, a real estate price collapse in Portugal, Greece, Italy and France. Only Germany has been spared, and, though it is important, it is not the entire Euro-zone. To make matters worse, European banks are far more highly leveraged than American banks (believe it or not). So, all these problems adds to their problems with the U.S. dollar based loans they bought.

huggy_in_london's picture

European Banks/ECB : "move along folks, nothing to see here"


lsbumblebee's picture

Jeez. Talk about a fantasy.

Hondo's picture

Look, the dollar story is not a story until it drops below the monthly low of 3/08 of 71.8.  The dollar had been moving lower since its monthly high of 120.2 in 1/02.  The only real question is with all the printing of money why hasn't the dollar fallen more and faster to at least pierce the low of 3/08.  People act like something major has hasn't.

chumbawamba's picture

Everything has changed.  You just don't notice it.  You need to change seats, apparently.

I am Chumbawamba.

morph366's picture

If this is all true it just goes to show how smart the Brits were to stay out of the Eurozone - that is, until they find out that foreigner's appetite for mountains of gilts is gilts is not is not it would have been with a more "robust" currency.


pivot's picture

i thought obama sets europeans' hearts aflutter?  cruel capitalists!

mitack's picture

Is ECB going to run printers like the FED does, paper prosperity, ya know, or are they going to help Italy drop out of the eurozone which would make them a huge favor currencywise ?

Assetman's picture

Do you mean to tell me that the Europeans don't believe Timmy Geithner is being truthful about America's "strong dollar" policy???

Perhaps the ECB needs to pay a visit to a crowd of students at an unnamed Chinese university...

Anonymous's picture

Like the old fable of the boy who cried wolf, the US cannot be believed or trusted when it keeps saying it has a strong dollar policy.

and the Chinese students were right to laugh at Timbo

Anonymous's picture

So Germany and other Euro countries should just start issuing all new debt in US$?
That would be the perfect hedge, either it sucks up dollars making dollar go up or Bendover prints even more making the debt loose value.

ZerOhead's picture

Sorry for stealing the guts of your post... I should read to the bottom of the thread first.

ADHD you know.

Anonymous's picture

I dont believe that Medley has been right about anything since Manny Johnson left.

Anonymous's picture

As the article points out (in case you missed it) the dollar and the renminbi trade alike. Thus, laughing at "Timbo's" comments about a strong dollar are akin to laughing at their own currency. The Chinese may be moving towards capitalism, but clearly haven't quite figured out the int'l currency game.

Anonymous's picture

Dollar? What is it - a new kind of a wallpaper?

Anonymous's picture

"Not only has Geithner recommitted publicly to the "strong dollar""

Why do we even bother saying this? Remember the clip of Bush saying "we have a strong dollar policy" and the interlocutor saying "what does that mean? the dollar is losing value" and Bush would just repeat "we have a strong dollar policy."

We seem to think that because you can lie to U.S. media and they will take it at face value, that the rest of the world will be so accomodating. We're really clueless about how extensively we've burned our global good will to the ground over the last ten years.

A Man without Qualities's picture

I think the Germans are feeling deeply uncertain.  There is a long standing commitment to a strong, stable currency as a key to controlling inflation, but Germany has been an industrial powerhouse with trade balances enabling them to be a net creditor nation.  The big concern is the balance of trade with China and the view that if exports drop, but this must be a consequence of the exchange rate.  However, it may be slightly different.  The products exported to China have been precision manufacturing tools, machinery etc that China needed as its industrial base grew and like many other nations have discovered with China, they often import the products and then they buy the equipment that makes the products and then they start exporting the same things back at you, but sell them for less.  

China may simply have acquired all it needs from Germany, and the exchange rate is irrelevant.

Anonymous's picture

I like Gold; here and now...The Great Unwinding has begun.

- Genesis

Anonymous's picture

China, they often import the products and then they buy the equipment that makes the products and then they start exporting the same things back at you, but sell them for less.


You missed the part where they steal the technology in the bargain. Until they start truly innovating technologically (which is inevitable I think), the Chinese will always do just enough business with the West to steal its newest technology. The examples are countless.

And the US has a "strong dollar" policy the same way Fat Albert has a "slim waistline" policy.

Anonymous's picture

Observers in their own zone see currency war.

Viewing the world as one economic entity, with a dash of cultural disparity and a pinch of political ideology;

one might recognize that adjustments to new facts, such as where production occurs and financing is obtained, require time and patience to unfold.

So the war perceived may be only an adjustment on the road to a currency that reflects the worldwide distribution of capital and labour, as one entity.

40muleteam borax

Anonymous's picture

Latvia is almost bust. Iceland came close. Spain and Ireland are really struggling. You better believe the euro banks are as risky.

TumblingDice's picture

Good analysis. We had Japan deflate into the US since 1990 and now theyre trying to get Europe to deflate into the US which in turn will moderately deflate into China. Pretty interesting to see if they can pull it off.

Anonymous's picture

Central bank jawboning of a currency higher or lower is blood in the water for FX market traders. It is the acknowledgment of a serious problem, minus the political will of an actual policy move.

If the ECB wants to pull the plug on euro gains (dollar losses), all they need do is cut rates again. Of course that seems rather unlikely, given the ECBs comparatively hawkish bent and indications that Europe may already be emerging from recession.

The alternative — beyond nothing more than talk — is to dial up the printing presses another notch.

If the US has indeed reached some sort of currency accord with China — at the expense of Europe’s export market — they may have grounds to be upset.

Let the competitive currency devaluations commence…

Anonymous's picture

And I would also add that the same holds true for US jawboning of the dollar.

You can repeat the phrase "strong dollar policy" all you want, but it's absolutely meaningless in the absence of actual dollar supportive policy.

0% interest rates, massive deficit spending, along with monetary expansion does not a strong currency make. Period. End of story.

Anonymous's picture

change you can believe in

Anonymous's picture

Fact is that Europe (whatever that is) is »run« by the old and some middle aged playboys (and a Merkel), who have absolutely NO idea what went/is going/ on. If they did, they would surely have “their” banks notice defaults on all those turds - they are "stuck" with - to their friendly American nation, first thing in the morning, just as Chinesse. Twice. it takes but a lawsuit.

Anonymous's picture

In my view, the euro is screwed and condemned to rise, as are the commodities currencies. In a world dominated by American and Chinese money printing, half the world likes gold and wants to own it, while the other half likes gold but needs some liquidity to fund day-to-day commerce. The latter will accumulate euros (because the ECB like the Bundesbank would not cut rates further even with a gun to their heads, so strong is their ideology they even raised rates in Jul 2007, when almost every major European banks were on the verge of collapse) or some currencies linked to hard commodities (equally fallible I think because all these countries would inevitably be the first to implode if deflation last longer than the next 6 months, which in my view is a near certainty.

Anonymous's picture

I am an European, ans as such I am personally very happy with a strong Euro: I'm richer !

I am soon going to bankrupt London to buy a flat.
A property costing 1,200,000 GBP 2 years ago is now at about 900,000 GBP today.

My 1,000,000 Euros buys me about 919,000 GBP today.

2 years ago, I would have had only 600,000 GBP with the same amount of Euros.

50% off on a property is not so a bad deal !