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Maret 26, 2009

Filed under: Uncategorized — bumi2009fans @ 1:55 am

Geithner sends dollar on roller-coaster ride

By Nick Godt, MarketWatch
Last update: 6:00 p.m. EDT March 25, 2009
NEW YORK (MarketWatch) — Treasury Secretary Timothy Geithner shook markets Wednesday when some of his comments over China’s call for a new global reserve currency led to confusion over U.S. policy and triggered a brief plunge in the dollar.
Speaking at a conference in New York, Geithner was asked his thoughts about comments from People’s Bank of China Gov. Zhou Xiaochuan, who has called for a new international reserve currency to replace the dollar.
Earlier this week, Zhou suggested that the International Monetary Fund’s Special Drawing Right should be given a greater role. The SDR is an international reserve asset, created by the IMF in 1969 to support the Bretton Woods fixed exchange-rate system. Its value is based on a basket of key international currencies.
           Chart of DXY
“I haven’t read the entire proposal,” Geithner said. “But the governor is a sensible man [and] anything he says deserves consideration.” As for “increasing the IMF drawing reserves, we are favorable to that.”
The dollar index ($DXY
The sharp market reaction forced Geithner to clarify his statements during his press conference.
The dollar remains the main global reserve currency, Geithner said, adding he does not see a change in that status in the foreseeable future. Speaking later on CNBC, he further clarified official U.S. policy by reiterating the Treasury’s long-held stance that a strong dollar is in America’s interest.
The dollar regained some lost ground after the clarification. 
“But the damage was done,” said Michael Gregory, senior economist at BMO Capital Markets.
“There are theoretical merits to a non-country specific reserve currency such as the SDR,” Gregory said. “But two wrongs don’t make a right, and this is not a university lecture.”
“Perhaps Geithner was attempting to give the Chinese an olive branch after his early-in-term politically-incorrect comment that China is manipulating the yuan,” Gregory said, referring to comments Geithner made in January.
U.S.-China policy
Zhou’s suggestions and Geithner’s comments came ahead of a key meeting between leading nations next week.
Finance ministers and central bankers from the G20, which includes 19 of the world’s largest economies and the European Union, are due to meet April 2, to address ways to tackle the global financial and economic crisis.
While currency policy is not on the official agenda, underlying tensions may come to the fore.
Tensions over currency and trade were a fixture of U.S.-Chinese relations over the past few years. The U.S., along with other countries, has accused Beijing of keeping the yuan artificially low in order to boost its exports.
The global financial and economic meltdown has partly changed the game. China is the largest holder of U.S. Treasury debt, and as it continues to buy more government bonds each month, Beijing helps keep interest rates low in the U.S. Yields on government bonds, which move inversely to their price, are used to benchmark mortgage rates and other consumer loans.
But with the U.S. now planning to spend $1 trillion to rescue its ailing banks, Chinese Premier Wen Jiabo indicated earlier this month that China worried about the safety of its U.S. investments in Treasurys.
Although the dollar has been stronger in recent months, as global investors turned to it as a safe haven asset, some worry that the U.S. currency could resume its multi-year decline as the government floods the system with dollars to boost the economy.
Last week, the Federal Reserve led the dollar to plunge as it announced a plan to buy up to $300 billion of Treasurys to bring borrowing costs down.
And on Wednesday, a Treasury auction of $34 billion worth of five-year notes drew less-than-expected demand. Indirect bidders, a closely watched metric because it includes buying by foreign central banks, bought 30% of the monthly auction, the lowest since December. .
Still, the U.S. might be unofficially open to expanding the IMF’s SDR system, which would result in a marginally weaker dollar, according to some analysts.
“A weaker dollar is stimulative for the U.S. economy and would relieve the U.S. of worrying about implementing effective monetary policy while weighing the international demand for a reserve currency,” said Kathy Lien, director of currency research at Global Forex Trading.
Still, speaking on CNBC, Geithner said that a strong dollar was in America’s interest. The Obama administration will do “everything” to improve America’s economy and to keep the U.S. debt burden “at a low and stable level”, he said.
The U.S., he said, is working “very closely” with China, and China “has a lot of confidence in U.S. policy.” End of Story
Nick Godt is a MarketWatch reporter based in New York.

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