Geithner Advocates a Weak Dollar Policy

The currencies and precious metals have been changing positions versus the dollar for the last three trading days. A week ago, we were looking at levels not seen in some currencies, ever…and for others not seen in over two years! I told you a week ago that I somewhat expected this to happen, as the currencies and metals had moved too far too fast, and needed to consolidate. This is what we’ve seen so far the last three days… And, also, like I’ve told you… I don’t expect this dollar strength to last too long, for the dollar has no yield to attract too many investors.

And speaking of yield… The Chinese raised rates yesterday, and that has taken some of the wind out of the commodity currencies, like Aussie (AUD) and kiwi (NZD)… But like I explained to a group of bankers I was talking to last week… This isn’t the first time China has responded the way a central bank should when they see housing beginning to overheat! So they’ve done the fundamentally correct thing, and the markets, for now, see this as a bad thing for the commodity currencies, for if China is raising rates, that means their economy will cool down… But remember, I’ve told you this on more than one occasion… The Chinese economy is moderating…not collapsing!

And gold? I just don’t expect this sell-off to last very long at all… Once the dollar goes back to the chopping blocks – because of no yields – gold will rebound, in my opinion (yes, I could be wrong)… Gold isn’t just rallying in recent weeks versus the dollar either! Gold has rallied against all fiat currencies… There are more than a few people out there calling for an end of the fiat currency regime for the world. I’m not on that train, folks… But you know that the Armageddon crowd are all over that theory like a cheap suit!

And think about this with regards to gold… Gold doesn’t have governments increasing taxes on it, gold has no limits on inflows while supply is limited. And then we have the US getting ready to unload $1 trillion (at least) in their latest rendition of money printing known as quantitative easing… And while governments are going around selling their currency to make it weaker, they sure aren’t selling their gold!

I gave an interview of sorts on the phone yesterday in the car, driving between Burlington and Stowe, and I was talking about silver… I was asked if silver was the “new gold”… I said, it just might be going forward, because gold has priced out the “mom and pops,” but silver still has a price that makes sense…

OH! AND HERE WAS THE BIG NEWS FROM YESTERDAY!!!! US Treasury Secretary Geithner said yesterday that “a weaker dollar may be in the national interest”… WOW!

For years, all I’ve heard are the sex, lies and videotape, that “a strong dollar was in the best interest of the US,” only to have the people muttering those words to turn around and say they want a stronger renminbi (or yen, back in the day) … For once, a US official speaks the truth about the dollar! Our plane to Burlington, VT had just landed when I got a text message from the big boss, Frank Trotter, telling me about what Geithner had said.

Apparently, the currency guys weren’t paying attention to Geithner, for the dollar remained in control with the hammer firmly grasped in its hand!

BUT… As Foreigner said… “But that was yesterday”… And Chuck adds… The dollar had the world in its hands, but it’s not the end of the my world, just a short change of plans…

And so it was in the overnight markets… THOSE GUYS PAID ATTENTION in class, and knew that when a government official like Geithner says that a weak dollar is OK, then traders are supposed to grant him his wish! So the rebound was on in Asia, and has carried over to the European session.

So… Just about the time you were getting ready to panic… The hammer-yielding dollar has slid back into its cave, like Puff the Magic Dragon, and you will not hear its mighty roar today…

One currency that’s really on the rebound is the Aussie dollar… I read story last night when I got back to my room about how traders were using the three-day slide in the Aussie dollar to buy at cheaper levels ahead of what they believe will be a rate hike at the next Reserve Bank of Australia (RBA) meeting, or if not then, by year-end. And I thought to myself, I said, “Self… Isn’t this what you’ve been telling people about? Telling them about the opportunities to buy at cheaper levels, and the rate hikes that are coming for Australia? Well, yes it is, self!” HA!

The Brazilian real (BRL) really took one to the chin yesterday, as the central bank selling, combined with the added taxes to foreign investments really ganged up on the real. But if the trading pattern this year has shown us anything, it’s shown us that the real reacts negatively to this kind of intervention for a short time, then bangs out of those restraints that the government has attached to the real, and gets back to rallying… Now, there’s no guarantee that this will happen again, folks… But, that’s been the pattern for 2010, and I don’t see any reason for that pattern to change, as long as Brazil sports the highest interest rate around town…

But don’t forget, the real is an emerging market currency, and can get caught in the crosswinds of an emerging market sell-off, which may have nothing to do with Brazil; but when it happens, all the emerging markets get thrown into a barrel, and treated the same… So, speculative money is all that should be used to hold real….

OK… I feel like the public broadcasting system when I talk about real, but…it’s got to be done!

So… We begin today’s trading with renewed fears of quantitative easing, and dollar debasement… And all that dollar buying the past three days is history!

In Canada yesterday… The Bank of Canada (BOC) downgraded Canada’s growth forecast. UGH! In reality, the BOC sees the handwriting on the wall for the US and believes it will filter over to the Canadian economy… Which makes sense, eh? But… given that downgrade to the forecast, I still believe that the BOC will be back to the rate hike table by the end of the first quarter of 2011… So… the Canadian dollar/loonie (CAD), will have these bouts of weakness on and off… But the underlying bias for loonies will be to buy… I think… Again, that’s just my opinion!

And the New Zealand dollar/kiwi is attempting to ignore the words from the Reserve Bank of New Zealand (RBNZ) Governor Bollard who endorsed the current view (by the markets) that rates are on hold until next year by saying, “The markets…expect that we will just be sitting there till early next year and that does not seem an unreasonable expectation”. UGH! That’s not what I expected to hear from Bollard or the RBNZ! But… You can go back for several years, and find where I’ve taken this guy to the woodshed on more than one occasion for dissing kiwi. He’s not a proponent of the “strong currency is the best medicine” theory… Shame on you Mr. Bollard!

But then right when I’m ready to throw him to the wolves, he says something that saves him… Like last night when he also ruled out intervention by saying, “FX intervention has only a temporary effect”.

To recap… The dollar had the hammer for all of yesterday, marking the third consecutive day of dollar strength… But then US Treasury Secretary Geithner said that the weak dollar was in our national interest… The US markets didn’t react to the statement, but the Asians did, and that has a currency and precious metals rebound in place this morning. China raised its interest rate for the first time in three years yesterday, doing what they feel they need to do to calm down their housing market, and Brazil is attempting to weaken the real once more… We’ll have to wait-n-see how long this attempt lasts!

Chuck Butler
for The Daily Reckoning