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Thursday, July 10, 2003

Talking the Dollar Up and Down

I think I make no secret of the fact that I wouldn't by any stretch of the imagination consider myself a currency specialist. I base a lot of my opinions on arguments from Morgan Stanley's Stephen Len (see next post, remember the 'trust' factor) and when this doesn't help I either lean on my brother, or ask Eddie, or call up Kevin to try to resue me from a tight spot. But blogging is a baptism of fire, and we seem to learn a little each time we move forward. As it happens I have been arguing that the key factor in the dollar depreciation was not the market response to some 'underlying economic fundamentals' but the perception by some key participants that the IMF was calling for a dollar correction, that the US Treasury was not resisting this view, and that the US had just won a war in Iraq (and before that in Afghanistan) and was in a position to impose its view. Now, from Brad's Blog come some unexpected re-inforcements for my view. Maybe the Cardinal sent some disloyal troops:

If neither monetary nor fiscal policy can be of use, the only remaining policy lever is to try to boost exports by talking the dollar down--a very difficult, hazardous, and possibly counterproductive exercise.
Source: Semi Daily Journal

So there it is, you can have a 'dollar policy' of talking up-and-dpwn the currency, and it is on a par with monetary and fiscal policy, it is part of what Eddie calls the macro arsenal. Of course I imagine Brad's 'caveat emptor' here would be to pivot himself on the difference between the short and the long run. In the long run (apart from being dead) all the talking up-and-down may make little difference to us, but in the short run it may make a lot (and precisely for the reasons Brad explains in his collected dialogues). And the reason why the US can do this (despite those notorious 'twin deficits'): because it is perceived to have the clout to do it, something the eurozone and Japan (despite their manifestly worse 'fundamentals') are not. The error in thinking about the non-effectiveness of dollar policy stems, I think, from seeing it as a question of market intervention. What I think Brad has very nicely demonstrated this week is that by generating the right expectations you can achieve a lot by doing very little (and apply the law of minimum effort). For these very reasons I imagine the US Treasury will be extremely circumspect in what they say publicly about rinban revaluation, precisely because of the risk that the Chinese might ignore the 'friendly advice'. So we are left with a lop-sided currency 'correction', whose logic, I have to admit, escapes me. And if 'winning the peace' in Iraq should turn out to be more difficult than imagined..................

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