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Coincidence? Paulson talks up the dollar, and oil slides

June 9, 2008 |  1:48 pm

Treasury Secretary Henry M. Paulson Jr. is trying to make currency speculators think twice before betting on a weaker dollar. And he’s having the desired effect, which also may be helping to pull oil prices lower today after Friday’s manic surge.

The greenback is rallying briskly against the euro and the yen after Paulson, on CNBC, said he wouldn’t rule out the idea of Treasury intervention to boost the U.S. currency’s value.

Paulson "I would never take intervention off the table or any policy tool off the table," he said. "And I just can’t speculate about what we will or won’t do."

The euro has slumped to $1.563 in New York trading from $1.584 in Asia overnight, a big move for one day.

Paulson’s boss, President Bush, also tried to jawbone the buck higher today. Speaking to reporters before leaving for a European trip, Bush reiterated that "a strong dollar is in our nation’s interests."

"They’re putting markets on notice," said Jay Bryson, global economist at Wachovia Corp. in Charlotte, N.C.

Maybe that's because they’re running out of other ideas to deal with the debilitating effects of soaring oil prices, which on Friday rocketed $10.75 a barrel to a record $138.54.

Because commodities are priced in dollars worldwide, commodity producers earn less as the U.S. currency loses value. That boosts their incentive (and the incentive of speculators) to keep prices moving up as the dollar slides.

If, instead, the dollar were to strengthen, that could put downward pressure on commodity prices. A more robust dollar also could encourage global investors to favor U.S. stocks and other assets over commodities, and dim the need for raw materials as an inflation hedge. (Yes, that might be wishful thinking, but stranger things have happened.)

Federal Reserve Chairman Ben S. Bernanke also turned up the heat on dollar bears last week, as I noted in this post.

The oil market could just be tired from its record run on Friday, but prices have come off today as the dollar has rebounded. Near-term crude futures in New York were down $3.87 to $134.67 a barrel late in the trading session.

Talk is always cheap when it comes to government policy on the dollar, but with Bush, Paulson and Bernanke all chattering on the issue, currency speculators at least have to be prepared that the White House could actually be serious.

Photo: Treasury Secretary Henry M. Paulson Jr. Karim Jaafar/AFP Photo