Yes, Geithner's just kidding about a 'strong dollar'

Despite Treasury Secretary Timothy Geithner’s latest emphatic statement about the need to "maintain a strong dollar," financial markets know he’s not serious.

The Obama administration, like the Bush administration before it, pays lip service to the idea of keeping the greenback strong even as the currency continues to lose value against its major and minor foreign rivals.

This is theater, but it’s still important in the scheme of things, says Dan Katzive, currency strategist at Credit Suisse in New York.

Although global markets fully expect the dollar to stay weak because of rock-bottom U.S. short-term interest rates and soaring federal borrowing (among other reasons), Katzive notes that it’s in everyone’s interest for any further decline in the buck to remain orderly -- which pretty much describes the drop since 2001.

The last thing the world needs is a sudden dollar collapse that could trigger market pandemonium.

The DXY index of the dollar’s value against six major rivals, including the euro and the yen, is down 37% since mid-2001, including this year’s slide of 7.6%.

With traders already inclined to keep selling the U.S. currency, imagine the market's reaction if Geithner were to say, "You know, we’ve thought about it, and we’d really like to see the dollar fall a lot more."

Even if the administration believes that -- given that a weakening buck is a boon to U.S. exporters -- no one in a position of power is going to say so, for fear of waving a red flag at markets.

Instead, by reiterating the stock phrase about dollar strength, "They’re assuring the markets that the U.S. isn’t going to talk the dollar down," Katzive says.

Besides, the administration has to be figuring there’s no reason to mess with success.

Consider: One long-term concern about a falling dollar is that it could undercut U.S. financial markets by scaring away foreign investors, whose dollar-denominated assets lose value as the greenback falls.

But the Treasury bond market isn’t suffering from a lack of investor demand even as the administration borrows record sums. And the U.S. stock market, too, remains robust, as investors see dollar weakness as good news for American multinational firms. The Dow Jones industrials are at a new one-year high today.

"It’s the best of everything right now," says Win Thin, a currency strategist at Brown Bros. Harriman in New York.

-- Tom Petruno

Photo: Treasury Secretary Timothy Geithner. Credit: Chris Ratcliffe / Bloomberg News

Comments

[Misterioso]

Characterizing Geithner's statement as "lip service" is generous indeed. It is a lie, as are all the economic pronouncements coming out of Washington these days. Look at the reality of what is going on vs. the spin that these politicians issue.