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Wednesday, May 14, 2003

The Global Medley

This piece from Forbes about the latest Global Medley report seems to confirm what I've been saying for longer than I care to remember: that it is the US Treasury (and not the ECB) who is really 'comfortable' with the changing currency parities. Reading about this report has reminded me of an earlier Fed Watch to be found on Brad's site. Which occasions two observations. Firstly they seem to be very well 'informed', and secondly it was actually in his comments on their 'deflation alert' that Paul Krugman warned of deflation expectations setting in for the long haul. Both Paul and Brad seem to have all they're confidence focused on the Fed. Paul says 'push this button', I say, by all means push, but let's not be too surprised if the result isn't the one we expect.

Officials at the U.S. Treasury Department are happy to see the dollar's gradual decline, but hope to keep markets guessing about its policy so as to prevent a disruptive plunge, macro-political advisory group Medley Global Advisors said. The Medley report, seen by market sources on Tuesday, said U.S. officials plan to counter any complaints at a G7 meeting this weekend with calls for Europe to cut interest rates and for Japan to undertake structural reform. "This is the U.S. retort at the G7 meeting. If the Europeans complain about the weak dollar, all the Treasury has to do is tell them to cut interest rates," said a trader at a large European bank in New York who had seen the report.

The Treasury believes that if Europe wants to stop the euro's export-choking appreciation against the dollar, a deep cut in euro zone interest rates will go a long way toward accomplishing that goal, the report said.The dollar sank to four-year lows against the euro on Monday after Treasury Secretary John Snow said a falling dollar helps exports, comments widely viewed as acceptance of a weaker currency.European and Japanese officials are not worried about current exchange rate levels but fear the U.S. administration's new tone has made it difficult to convince markets the U.S. favors anything but a gradually weakening currency, the report said.The dollar recovered a little on Tuesday after Snow said a sound currency is key to a sound economy. But Snow also said this week that currencies should reflect economic forces and not be held artificially high or low by intervention.

Market players say Japan has secretly intervened in markets lately in an effort to counter the dollar's fall, which hurts its exports, a key source of economic growth for an economy struggling with deflation and a decade-long slump.On Tuesday, traders said monetary authorities bought dollars for yen during the Asian and London trading sessions. But the Bank of Japan and the Ministry of Finance refused to confirm such transactions.In data released last week, Japan said it spent 2.38 trillion yen ($20.44 billion) on currency intervention during the first quarter. Even European officials are starting to worry about the dollar's impact on the competitiveness of European exports as its economy also suffers. The dollar is down 9 percent against the euro this year and it has shed about 20 percent in the past 12 months.
Source: Forbes

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