Briefing.com likes our turn of the phrase yesterday:

13:56 10-Yr:-14/32..5.186%.. GNMAs:-09/32..
USD/JPY:110.2150.. EUR/USD:1.2891

"Whackage" May Extend
into Next Week:
  The market continues its slow spiral lower, weighed
upon by inflation worries & will face the week ahead braced for a run of
specified pricing reports.  The data due include the TICS report, which,
although a slow release (2 months behind) it will still be scoured for the
"who’s doing what for US" aspect.  The PPI & CPI reports
have the potential to cause further "whackage" (thank you Mr. Ritholtz,
for coining a word full of truthiness).
All the major breakdowns on the
pricing index data are expected to show increases…with of course, the
exception of CPI core-ex-food & energy (who needs ‘em?) which is expected to
dip to 0.2% from 0.3% with PPI ex-sustenance, gas & heat, is expected to
print flat at 1.7%.  The week is sprinkled with other potentially incriminating
data that will have players using contorted mental calculations to determine
what it all means for the data devotional Fed.

Glad you liked it, Beth!

Category: Financial Press, Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

19 Responses to “Whackage!”

  1. andiron says:

    Barry: How are you hedging against possible dollar rout..This is becoming my main concern..I think IB(international brokers) allow euro hedging…
    I couldn’t just trigger it. Everbank seems too expensive.
    How do you feel about dollar?

  2. Max says:

    Could you work on getting something more positive into the language? Maybe “bullage” if that could be done with truthiness.

  3. wcw says:

    Isn’t IB “interactive brokers”? They’ll let you trade currencies all day long, but then you’re overweight cash, though at least not dollars. They’ll also trade futures for you, but then you’re exposed to a dollar rally.

    Futures options is probably where you want to hedge, given how you ask. To minimize the volatility you have to pay, stick with basket indexes instead of currency pairs. The two big dollar indexes I know (and I am hardly expert) are the USDX and the CME$INDEX, of which despite the stupid name I prefer the latter, since its basket is less overweight Euros.

    These contracts are pretty big ($1,000 times the index, or ~$90,000 right now), for which near-the-money puts look to cost you ~$500 unless I misread my screen. (Do I? That implied vol looks low even for a currency basket.)

    If you do end up in the money near expiration, please don’t take delivery. These things are not cash-settled, more’s the pity.

  4. vf says:

    ticker: fxe, is the etf for the euro. tracks pretty close and pays a dividend

  5. Lowell says:

    Hold some gld/slv & uso for a good dollar hedge. Hard assets will do better than the Euro.

    Don’t be surprised if there is a correction before the next run up.

    Buy some stocks or funds (dodfx for example & loomis sayles) that don’t do currency hedging. They’ll go up as the dollar goes down.

  6. Ned says:

    Everyone is looking for a dollar plunge. Time for a countertrend buck rally? That would inflict serious “whackage” on the gold market, which by every measure was frothy and overbought. Just a guess. NOT advice. Barry, care to comment on Japan?

  7. Larry Nusbaum, Scottsdale says:

    THE DOLLAR IS CRASHING AS WILL MOST FIAT CURRENCIES AROUND THE WORLD. WHAT TO DO:
    1. Systematic purchase of physical gold & silver.
    2. Own major mining stocks and some Jr. mining stocks that are 43-101 compliant.
    3. Buy Futures contracts on gold and silver (options too rich) and corn.
    4. Buy Canadian & Australian debt and equity ETFs.
    5. Get off margin and payoff all HELOCs.
    6. Look at funds that short the dollar and short the US markets. (Pro Funds & Rydex)
    7. Buy puts on the QQQQ and SPY
    8. Sell short the SPY & QQQQ

  8. toddZ says:

    Is it me, or is everybody brushing off this sell-off as “no big deal!” I think we have more room to sell only because everyone is so complacent. When I turn on CNBC next week and see people with nervous ticks and hollow looks in their eyes the “Whackage” will be wrapping up.

    The bears were still in control at the Friday close.

    BTW — 1) the dollar is oversold for now and 2) beware of the 10 yr bond technical break-out.

  9. calmo says:

    “Whackage” I thought was high poetry at the time and I suggest you leverage it on your next Kudlow appearance by carrying a newspaper or 2 on board.
    The moment the other guests step out of line is your cue to start rolling up the newspaper into whack-mode. Seriously, these poetic moments should not be discarded so frivolously…

  10. Mark says:

    And to think it was just a typo! Barry meant to write “wreckage” but had a GWB moment. Now people think he is Sappho. Can an endowed chair at one of the nation’s finer liberal arts institutions be far behind?

  11. jjr says:

    ‘Is it me, or is everybody brushing off this sell-off as “no big deal!”‘

    –ToddZ

    I see the same Todd. Until the story about a declining market moves to the front pages, it’s not overdone. I saw quite a bit of complacency out there about two triple-digit down days in the Dow and two greater than 1% declines in Nazzy Star. Although the CNBC cheeleaders were surprisingly sullen.

    Although as a counterpoint there is Bill Cara talking about a 2006 reprise of Black Monday on billcara.com …

  12. john says:

    Great – Cara is talking about a Black Monday – oh goody. Here’s my non-expert opinion. Everything is oversold – everybody is flush with cash – everything is ripe for buying – exactly what has changed that caused the market to go down? Dollar crashing? No that’s been going on for several years. Oil rising? No that’s been going on for quite awhile. Commodities dropping? No they’re just resting.

    The fact that no one is quite sure why the market went down is a good reason for it to go back up. I’ve heard everything from inflation worries (what me worry) to the fact that NSA is collecting phone records apparently illegally. (Not that they’re collecting them but the fact that they are was reported).

    I think the market has a go no where day on Monday (an NR7 event on the major indices) and explodes on Tuesday (if it doesn’t explode on Monday). Not advice – just an opinion – and we all know the value of those.

  13. vf says:

    Did you guys the the article in today’s WSJ titled: “U.S. Goes Along With Dollar’s Fall to Ease Trade Gap”? Are the people responsible for this debacle in Iraq now going to start screwing with the currency markets? That seems to be a risky proposition considering we ask foreigners to finance half of our debt. Foreign holders of treasuries are getting crushed with the double whammy of the falling dollar and falling treasury prices. They haven’t exactly stepped up to the plate at recent auctions either. now the government is in a concerted effort to devalue the currency. the stock market was down thursday and friday because of the selling in the dollar and treasuries. with the Fed and the Treasury seemingly on the same team, i expect all three will continue to see sellers.

  14. U.S. Goes Along With Dollar’s Fall to Ease Trade Gap -
    Quiet Acquiescence Holds Possible Risks for Economy;
    Surge in Exports in March
    By MICHAEL M. PHILLIPS and SHAHID SHAH
    May 13, 2006; Page A1

    WASHINGTON — The Bush administration is quietly acquiescing in the dollar’s recent slide, a potentially risky approach but one it hopes may gently narrow the yawning U.S. trade gap by realigning world currencies.

    On Friday, government data showed that gap shrank in March. The Commerce Department said the monthly U.S. trade deficit narrowed to $62 billion, the smallest figure in seven months, spurred by record exports and an import bill that dropped somewhat despite high oil prices.

    The administration hopes a falling dollar eventually will help the trend, by making U.S. exports cheaper for foreigners and goods made abroad more expensive for Americans. The dollar began falling late last year. Since the start of April, its drop has accelerated against a variety of currencies, from the euro to the yen.

    But backing currency depreciation can be tricky. The dollar’s slow slide could become a steep plunge if markets turn against it — particularly if investors fear that U.S. officials are trying to engineer a drop. That’s why the administration isn’t calling attention to its stance, except for attempts to press China and its neighbors to strengthen their currencies.

    A falling currency also adds to inflationary pressure at home. Fear of that effect increasingly is rattling financial markets. The Labor Department said on Friday that U.S. import prices rose 2.1% in April after two straight months of declines — though the boost was due largely to a rise in petroleum prices, not currency shifts.

    America’s current-account deficit, the gap on trade and investment income, measured a record 6.4% of gross domestic product last year. That deficit is considered a potential drag on economic growth — and possible political issue in an election year.

    Treasury Secretary John Snow and other members of President Bush’s economic team see continued dollar weakness — combined with stronger economic growth abroad — helping curb the trade deficit, according to people familiar with the administration’s thinking.

    “If we’re going to get our trade deficit down to manageable proportions, it’s hard to see how that could happen without a very substantial depreciation of the dollar, and that means against most currencies,” says Princeton University economist Alan Blinder, a former vice chairman of the Federal Reserve Board.

    Economists warn that it takes time for shifting foreign-exchange rates to make their way into order books for exports and imports. But growth has picked up in Japan and other countries overseas, and overall U.S. sales to foreigners of everything from soybeans to software are on the rise. Excluding the volatile sales of aircraft and petroleum products, exports surged to $76.5 billion in March, up 13.8% from a year earlier.

    ‘Exports Are Improving’

    “There’s no question exports are improving,” says Ian Shepherdson, chief U.S. economist for High Frequency Economics, an independent research firm based in Valhalla, N.Y. He credits “strong growth outside the U.S. and a bit of dollar weakening, maybe.”

    Macroeconomic Advisers, a St. Louis economic-research firm, forecasts that the trade deficit will widen through September, then shrink at least through the end of next year. The effect of a weaker dollar initially will be “small, but it gathers steam in early 2007,” says Ken Matheny, a senior economist at the company.

    The Bush administration’s approach demands a delicate bit of financial diplomacy. With currency traders highly sensitive to any perceived shift in government policy, Mr. Snow must be careful to avoid remarks that either halt the dollar’s slow decline or inadvertently push it into a freefall that could further drive up U.S. interest rates, scare away foreign investors worried about a plunge in dollar-denominated assets and slow the economy.

    “The difficulty is it’s impossible to say anything intelligent about exchange rates without risking being misunderstood and possibly causing exchange-rate volatility,” says Kristin Forbes, a Massachusetts Institute of Technology economist and former aide to Mr. Bush. Even the failure to speak out against the dollar’s decline could provoke a sharp market response.

    Mr. Snow has opted for a multipronged approach: He has kept almost mum regarding the dollar’s overall value, while actively seeking to weaken it against the Chinese yuan and currencies from other areas of East Asia that are running big trade surpluses with the U.S. He also has been hectoring Japan and Europe to take steps — such as loosening labor protections — that could speed their economic growth.

    To keep from stirring overall currency markets too much, Mr. Snow has stuck to a variation of the strong-dollar mantra crafted by the Clinton administration, an anodyne statement at a time when markets are convinced that Treasury doesn’t want the dollar to strengthen. “A strong dollar is in our nation’s interest, and currency values should be determined in open and competitive markets in response to underlying economic fundamentals,” Mr. Snow said Wednesday.

    That same day, the dollar hit a 28-year low against the Canadian dollar and a nine-year low against the South Korean won. Both the British pound, which traded at $1.8909 mid-afternoon yesterday and the euro, which bought $1.2885, are the strongest they’ve been in a year against the dollar. Measured against a Federal Reserve index of 19 major currencies, the dollar had slipped to 81.28 Friday from 85.17 in March.

    One reason the dollar is feeling pressure is a growing sense in markets that the Federal Reserve may soon pause in its campaign to raise interest rates, while central banks in Europe and Japan may be lifting their rates in the near future. Economists say that higher interest rates tend to strengthen a country’s currency because they draw in more investment.

    Mr. Snow and his team are naturally suspicious of the idea that governments can or should meddle with exchange rates except in extreme cases.

    Still, the protectionist sentiment sweeping Congress has forced the secretary to be more overt in his efforts to persuade China to allow the yuan to rise in relation to the dollar. The U.S. posted a $15.6 billion deficit with China in March, up from $12.9 billion a year earlier and by far the country’s single largest bilateral trade gap.

    U.S. exports to China rose during the period, to $4.96 billion from $3.31 billion, amid increased shipments of U.S.-made semiconductors and aircraft. But the increase was overwhelmed by a $5.29 billion surge in imports from China, to $47.321 billion, led by computers, computer parts and cellphones.

    Chinese officials have vowed to take steps to help correct the imbalance. Early last month, Chinese officials went on a buying spree in the U.S., signing long-term deals to coincide with President Hu Jintao’s visit to Washington. They’ve also promised to take steps to increase domestic demand in China for U.S.-made goods. But it may take months, in some cases years, for those pledges to translate into actual trade.

    Exchange rates have been the main focus of bilateral tension. This past week, Mr. Snow said he was “extremely dissatisfied” that China, which has taken some steps to make its rigid exchange rate more flexible, hasn’t gone further.

    Mr. Snow argues such a move would benefit China’s red-hot economy by helping it avoid a sudden crash. He also predicts that it would ripple through the other nations of East Asia that are keeping their currencies weak against the dollar and exporting heavily to the U.S. Implicit in his statement is a desire for a broad depreciation of the U.S. dollar against the currencies of the major economies of East Asia.

    Even so, Treasury officials couch their desire in such terms as “adjusting” or “flexibility.” They don’t talk about a falling dollar.

    Limited Ability

    The U.S. has limited ability to sway currency prices, whether through action or inaction. Last month, Mr. Snow orchestrated a joint statement of the Group of Seven major industrialized nations calling for “greater exchange-rate flexibility” in China and elsewhere in Asia.

    Not long afterward, Japanese Finance Minister Sadakazu Tanigaki, who had signed off on the statement, appeared to back away by talking down the yen and — by implication touting the dollar. “The G7 statement does not call for a depreciation of the dollar,” he said at this month’s meeting of the Asian Development Bank in India. “I’m worried that the market has misunderstood the G7.”

    Mr. Snow’s top international hand, Undersecretary for International Affairs Tim Adams, immediately fired back. “We should allow markets to set the values of exchange rates, and probably we should all refrain from not only intervening but commenting on exchange rates,” he said at the same meeting.

  15. U.S. Goes Along With Dollar’s Fall to Ease Trade Gap -
    Quiet Acquiescence Holds Possible Risks for Economy;
    Surge in Exports in March
    By MICHAEL M. PHILLIPS and SHAHID SHAH
    May 13, 2006; Page A1

    WASHINGTON — The Bush administration is quietly acquiescing in the dollar’s recent slide, a potentially risky approach but one it hopes may gently narrow the yawning U.S. trade gap by realigning world currencies.

    On Friday, government data showed that gap shrank in March. The Commerce Department said the monthly U.S. trade deficit narrowed to $62 billion, the smallest figure in seven months, spurred by record exports and an import bill that dropped somewhat despite high oil prices.

    The administration hopes a falling dollar eventually will help the trend, by making U.S. exports cheaper for foreigners and goods made abroad more expensive for Americans. The dollar began falling late last year. Since the start of April, its drop has accelerated against a variety of currencies, from the euro to the yen.

    But backing currency depreciation can be tricky. The dollar’s slow slide could become a steep plunge if markets turn against it — particularly if investors fear that U.S. officials are trying to engineer a drop. That’s why the administration isn’t calling attention to its stance, except for attempts to press China and its neighbors to strengthen their currencies.

    A falling currency also adds to inflationary pressure at home. Fear of that effect increasingly is rattling financial markets. The Labor Department said on Friday that U.S. import prices rose 2.1% in April after two straight months of declines — though the boost was due largely to a rise in petroleum prices, not currency shifts.

    America’s current-account deficit, the gap on trade and investment income, measured a record 6.4% of gross domestic product last year. That deficit is considered a potential drag on economic growth — and possible political issue in an election year.

    Treasury Secretary John Snow and other members of President Bush’s economic team see continued dollar weakness — combined with stronger economic growth abroad — helping curb the trade deficit, according to people familiar with the administration’s thinking.

    “If we’re going to get our trade deficit down to manageable proportions, it’s hard to see how that could happen without a very substantial depreciation of the dollar, and that means against most currencies,” says Princeton University economist Alan Blinder, a former vice chairman of the Federal Reserve Board.

    Economists warn that it takes time for shifting foreign-exchange rates to make their way into order books for exports and imports. But growth has picked up in Japan and other countries overseas, and overall U.S. sales to foreigners of everything from soybeans to software are on the rise. Excluding the volatile sales of aircraft and petroleum products, exports surged to $76.5 billion in March, up 13.8% from a year earlier.

    ‘Exports Are Improving’

    “There’s no question exports are improving,” says Ian Shepherdson, chief U.S. economist for High Frequency Economics, an independent research firm based in Valhalla, N.Y. He credits “strong growth outside the U.S. and a bit of dollar weakening, maybe.”

    Macroeconomic Advisers, a St. Louis economic-research firm, forecasts that the trade deficit will widen through September, then shrink at least through the end of next year. The effect of a weaker dollar initially will be “small, but it gathers steam in early 2007,” says Ken Matheny, a senior economist at the company.

    The Bush administration’s approach demands a delicate bit of financial diplomacy. With currency traders highly sensitive to any perceived shift in government policy, Mr. Snow must be careful to avoid remarks that either halt the dollar’s slow decline or inadvertently push it into a freefall that could further drive up U.S. interest rates, scare away foreign investors worried about a plunge in dollar-denominated assets and slow the economy.

    “The difficulty is it’s impossible to say anything intelligent about exchange rates without risking being misunderstood and possibly causing exchange-rate volatility,” says Kristin Forbes, a Massachusetts Institute of Technology economist and former aide to Mr. Bush. Even the failure to speak out against the dollar’s decline could provoke a sharp market response.

    Mr. Snow has opted for a multipronged approach: He has kept almost mum regarding the dollar’s overall value, while actively seeking to weaken it against the Chinese yuan and currencies from other areas of East Asia that are running big trade surpluses with the U.S. He also has been hectoring Japan and Europe to take steps — such as loosening labor protections — that could speed their economic growth.

    To keep from stirring overall currency markets too much, Mr. Snow has stuck to a variation of the strong-dollar mantra crafted by the Clinton administration, an anodyne statement at a time when markets are convinced that Treasury doesn’t want the dollar to strengthen. “A strong dollar is in our nation’s interest, and currency values should be determined in open and competitive markets in response to underlying economic fundamentals,” Mr. Snow said Wednesday.

    That same day, the dollar hit a 28-year low against the Canadian dollar and a nine-year low against the South Korean won. Both the British pound, which traded at $1.8909 mid-afternoon yesterday and the euro, which bought $1.2885, are the strongest they’ve been in a year against the dollar. Measured against a Federal Reserve index of 19 major currencies, the dollar had slipped to 81.28 Friday from 85.17 in March.

    One reason the dollar is feeling pressure is a growing sense in markets that the Federal Reserve may soon pause in its campaign to raise interest rates, while central banks in Europe and Japan may be lifting their rates in the near future. Economists say that higher interest rates tend to strengthen a country’s currency because they draw in more investment.

    Mr. Snow and his team are naturally suspicious of the idea that governments can or should meddle with exchange rates except in extreme cases.

    Still, the protectionist sentiment sweeping Congress has forced the secretary to be more overt in his efforts to persuade China to allow the yuan to rise in relation to the dollar. The U.S. posted a $15.6 billion deficit with China in March, up from $12.9 billion a year earlier and by far the country’s single largest bilateral trade gap.

    U.S. exports to China rose during the period, to $4.96 billion from $3.31 billion, amid increased shipments of U.S.-made semiconductors and aircraft. But the increase was overwhelmed by a $5.29 billion surge in imports from China, to $47.321 billion, led by computers, computer parts and cellphones.

    Chinese officials have vowed to take steps to help correct the imbalance. Early last month, Chinese officials went on a buying spree in the U.S., signing long-term deals to coincide with President Hu Jintao’s visit to Washington. They’ve also promised to take steps to increase domestic demand in China for U.S.-made goods. But it may take months, in some cases years, for those pledges to translate into actual trade.

    Exchange rates have been the main focus of bilateral tension. This past week, Mr. Snow said he was “extremely dissatisfied” that China, which has taken some steps to make its rigid exchange rate more flexible, hasn’t gone further.

    Mr. Snow argues such a move would benefit China’s red-hot economy by helping it avoid a sudden crash. He also predicts that it would ripple through the other nations of East Asia that are keeping their currencies weak against the dollar and exporting heavily to the U.S. Implicit in his statement is a desire for a broad depreciation of the U.S. dollar against the currencies of the major economies of East Asia.

    Even so, Treasury officials couch their desire in such terms as “adjusting” or “flexibility.” They don’t talk about a falling dollar.

    Limited Ability

    The U.S. has limited ability to sway currency prices, whether through action or inaction. Last month, Mr. Snow orchestrated a joint statement of the Group of Seven major industrialized nations calling for “greater exchange-rate flexibility” in China and elsewhere in Asia.

    Not long afterward, Japanese Finance Minister Sadakazu Tanigaki, who had signed off on the statement, appeared to back away by talking down the yen and — by implication touting the dollar. “The G7 statement does not call for a depreciation of the dollar,” he said at this month’s meeting of the Asian Development Bank in India. “I’m worried that the market has misunderstood the G7.”

    Mr. Snow’s top international hand, Undersecretary for International Affairs Tim Adams, immediately fired back. “We should allow markets to set the values of exchange rates, and probably we should all refrain from not only intervening but commenting on exchange rates,” he said at the same meeting.

  16. U.S. Goes Along With Dollar’s Fall to Ease Trade Gap -
    Quiet Acquiescence Holds Possible Risks for Economy;
    Surge in Exports in March
    By MICHAEL M. PHILLIPS and SHAHID SHAH
    May 13, 2006; Page A1

    WASHINGTON — The Bush administration is quietly acquiescing in the dollar’s recent slide, a potentially risky approach but one it hopes may gently narrow the yawning U.S. trade gap by realigning world currencies.

    On Friday, government data showed that gap shrank in March. The Commerce Department said the monthly U.S. trade deficit narrowed to $62 billion, the smallest figure in seven months, spurred by record exports and an import bill that dropped somewhat despite high oil prices.

    The administration hopes a falling dollar eventually will help the trend, by making U.S. exports cheaper for foreigners and goods made abroad more expensive for Americans. The dollar began falling late last year. Since the start of April, its drop has accelerated against a variety of currencies, from the euro to the yen.

    But backing currency depreciation can be tricky. The dollar’s slow slide could become a steep plunge if markets turn against it — particularly if investors fear that U.S. officials are trying to engineer a drop. That’s why the administration isn’t calling attention to its stance, except for attempts to press China and its neighbors to strengthen their currencies.

    A falling currency also adds to inflationary pressure at home. Fear of that effect increasingly is rattling financial markets. The Labor Department said on Friday that U.S. import prices rose 2.1% in April after two straight months of declines — though the boost was due largely to a rise in petroleum prices, not currency shifts.

    America’s current-account deficit, the gap on trade and investment income, measured a record 6.4% of gross domestic product last year. That deficit is considered a potential drag on economic growth — and possible political issue in an election year.

    Treasury Secretary John Snow and other members of President Bush’s economic team see continued dollar weakness — combined with stronger economic growth abroad — helping curb the trade deficit, according to people familiar with the administration’s thinking.

    “If we’re going to get our trade deficit down to manageable proportions, it’s hard to see how that could happen without a very substantial depreciation of the dollar, and that means against most currencies,” says Princeton University economist Alan Blinder, a former vice chairman of the Federal Reserve Board.

    Economists warn that it takes time for shifting foreign-exchange rates to make their way into order books for exports and imports. But growth has picked up in Japan and other countries overseas, and overall U.S. sales to foreigners of everything from soybeans to software are on the rise. Excluding the volatile sales of aircraft and petroleum products, exports surged to $76.5 billion in March, up 13.8% from a year earlier.

    ‘Exports Are Improving’

    “There’s no question exports are improving,” says Ian Shepherdson, chief U.S. economist for High Frequency Economics, an independent research firm based in Valhalla, N.Y. He credits “strong growth outside the U.S. and a bit of dollar weakening, maybe.”

    Macroeconomic Advisers, a St. Louis economic-research firm, forecasts that the trade deficit will widen through September, then shrink at least through the end of next year. The effect of a weaker dollar initially will be “small, but it gathers steam in early 2007,” says Ken Matheny, a senior economist at the company.

    The Bush administration’s approach demands a delicate bit of financial diplomacy. With currency traders highly sensitive to any perceived shift in government policy, Mr. Snow must be careful to avoid remarks that either halt the dollar’s slow decline or inadvertently push it into a freefall that could further drive up U.S. interest rates, scare away foreign investors worried about a plunge in dollar-denominated assets and slow the economy.

    “The difficulty is it’s impossible to say anything intelligent about exchange rates without risking being misunderstood and possibly causing exchange-rate volatility,” says Kristin Forbes, a Massachusetts Institute of Technology economist and former aide to Mr. Bush. Even the failure to speak out against the dollar’s decline could provoke a sharp market response.

    Mr. Snow has opted for a multipronged approach: He has kept almost mum regarding the dollar’s overall value, while actively seeking to weaken it against the Chinese yuan and currencies from other areas of East Asia that are running big trade surpluses with the U.S. He also has been hectoring Japan and Europe to take steps — such as loosening labor protections — that could speed their economic growth.

    To keep from stirring overall currency markets too much, Mr. Snow has stuck to a variation of the strong-dollar mantra crafted by the Clinton administration, an anodyne statement at a time when markets are convinced that Treasury doesn’t want the dollar to strengthen. “A strong dollar is in our nation’s interest, and currency values should be determined in open and competitive markets in response to underlying economic fundamentals,” Mr. Snow said Wednesday.

    That same day, the dollar hit a 28-year low against the Canadian dollar and a nine-year low against the South Korean won. Both the British pound, which traded at $1.8909 mid-afternoon yesterday and the euro, which bought $1.2885, are the strongest they’ve been in a year against the dollar. Measured against a Federal Reserve index of 19 major currencies, the dollar had slipped to 81.28 Friday from 85.17 in March.

    One reason the dollar is feeling pressure is a growing sense in markets that the Federal Reserve may soon pause in its campaign to raise interest rates, while central banks in Europe and Japan may be lifting their rates in the near future. Economists say that higher interest rates tend to strengthen a country’s currency because they draw in more investment.

    Mr. Snow and his team are naturally suspicious of the idea that governments can or should meddle with exchange rates except in extreme cases.

    Still, the protectionist sentiment sweeping Congress has forced the secretary to be more overt in his efforts to persuade China to allow the yuan to rise in relation to the dollar. The U.S. posted a $15.6 billion deficit with China in March, up from $12.9 billion a year earlier and by far the country’s single largest bilateral trade gap.

    U.S. exports to China rose during the period, to $4.96 billion from $3.31 billion, amid increased shipments of U.S.-made semiconductors and aircraft. But the increase was overwhelmed by a $5.29 billion surge in imports from China, to $47.321 billion, led by computers, computer parts and cellphones.

    Chinese officials have vowed to take steps to help correct the imbalance. Early last month, Chinese officials went on a buying spree in the U.S., signing long-term deals to coincide with President Hu Jintao’s visit to Washington. They’ve also promised to take steps to increase domestic demand in China for U.S.-made goods. But it may take months, in some cases years, for those pledges to translate into actual trade.

    Exchange rates have been the main focus of bilateral tension. This past week, Mr. Snow said he was “extremely dissatisfied” that China, which has taken some steps to make its rigid exchange rate more flexible, hasn’t gone further.

    Mr. Snow argues such a move would benefit China’s red-hot economy by helping it avoid a sudden crash. He also predicts that it would ripple through the other nations of East Asia that are keeping their currencies weak against the dollar and exporting heavily to the U.S. Implicit in his statement is a desire for a broad depreciation of the U.S. dollar against the currencies of the major economies of East Asia.

    Even so, Treasury officials couch their desire in such terms as “adjusting” or “flexibility.” They don’t talk about a falling dollar.

    Limited Ability

    The U.S. has limited ability to sway currency prices, whether through action or inaction. Last month, Mr. Snow orchestrated a joint statement of the Group of Seven major industrialized nations calling for “greater exchange-rate flexibility” in China and elsewhere in Asia.

    Not long afterward, Japanese Finance Minister Sadakazu Tanigaki, who had signed off on the statement, appeared to back away by talking down the yen and — by implication touting the dollar. “The G7 statement does not call for a depreciation of the dollar,” he said at this month’s meeting of the Asian Development Bank in India. “I’m worried that the market has misunderstood the G7.”

    Mr. Snow’s top international hand, Undersecretary for International Affairs Tim Adams, immediately fired back. “We should allow markets to set the values of exchange rates, and probably we should all refrain from not only intervening but commenting on exchange rates,” he said at the same meeting.

  17. U.S. Goes Along With Dollar’s Fall to Ease Trade Gap -
    Quiet Acquiescence Holds Possible Risks for Economy;
    Surge in Exports in March
    By MICHAEL M. PHILLIPS and SHAHID SHAH
    May 13, 2006; Page A1

    WASHINGTON — The Bush administration is quietly acquiescing in the dollar’s recent slide, a potentially risky approach but one it hopes may gently narrow the yawning U.S. trade gap by realigning world currencies.

    On Friday, government data showed that gap shrank in March. The Commerce Department said the monthly U.S. trade deficit narrowed to $62 billion, the smallest figure in seven months, spurred by record exports and an import bill that dropped somewhat despite high oil prices.

    The administration hopes a falling dollar eventually will help the trend, by making U.S. exports cheaper for foreigners and goods made abroad more expensive for Americans. The dollar began falling late last year. Since the start of April, its drop has accelerated against a variety of currencies, from the euro to the yen.

    But backing currency depreciation can be tricky. The dollar’s slow slide could become a steep plunge if markets turn against it — particularly if investors fear that U.S. officials are trying to engineer a drop. That’s why the administration isn’t calling attention to its stance, except for attempts to press China and its neighbors to strengthen their currencies.

    A falling currency also adds to inflationary pressure at home. Fear of that effect increasingly is rattling financial markets. The Labor Department said on Friday that U.S. import prices rose 2.1% in April after two straight months of declines — though the boost was due largely to a rise in petroleum prices, not currency shifts.

    America’s current-account deficit, the gap on trade and investment income, measured a record 6.4% of gross domestic product last year. That deficit is considered a potential drag on economic growth — and possible political issue in an election year.

    Treasury Secretary John Snow and other members of President Bush’s economic team see continued dollar weakness — combined with stronger economic growth abroad — helping curb the trade deficit, according to people familiar with the administration’s thinking.

    “If we’re going to get our trade deficit down to manageable proportions, it’s hard to see how that could happen without a very substantial depreciation of the dollar, and that means against most currencies,” says Princeton University economist Alan Blinder, a former vice chairman of the Federal Reserve Board.

    Economists warn that it takes time for shifting foreign-exchange rates to make their way into order books for exports and imports. But growth has picked up in Japan and other countries overseas, and overall U.S. sales to foreigners of everything from soybeans to software are on the rise. Excluding the volatile sales of aircraft and petroleum products, exports surged to $76.5 billion in March, up 13.8% from a year earlier.

    ‘Exports Are Improving’

    “There’s no question exports are improving,” says Ian Shepherdson, chief U.S. economist for High Frequency Economics, an independent research firm based in Valhalla, N.Y. He credits “strong growth outside the U.S. and a bit of dollar weakening, maybe.”

    Macroeconomic Advisers, a St. Louis economic-research firm, forecasts that the trade deficit will widen through September, then shrink at least through the end of next year. The effect of a weaker dollar initially will be “small, but it gathers steam in early 2007,” says Ken Matheny, a senior economist at the company.

    The Bush administration’s approach demands a delicate bit of financial diplomacy. With currency traders highly sensitive to any perceived shift in government policy, Mr. Snow must be careful to avoid remarks that either halt the dollar’s slow decline or inadvertently push it into a freefall that could further drive up U.S. interest rates, scare away foreign investors worried about a plunge in dollar-denominated assets and slow the economy.

    “The difficulty is it’s impossible to say anything intelligent about exchange rates without risking being misunderstood and possibly causing exchange-rate volatility,” says Kristin Forbes, a Massachusetts Institute of Technology economist and former aide to Mr. Bush. Even the failure to speak out against the dollar’s decline could provoke a sharp market response.

    Mr. Snow has opted for a multipronged approach: He has kept almost mum regarding the dollar’s overall value, while actively seeking to weaken it against the Chinese yuan and currencies from other areas of East Asia that are running big trade surpluses with the U.S. He also has been hectoring Japan and Europe to take steps — such as loosening labor protections — that could speed their economic growth.

    To keep from stirring overall currency markets too much, Mr. Snow has stuck to a variation of the strong-dollar mantra crafted by the Clinton administration, an anodyne statement at a time when markets are convinced that Treasury doesn’t want the dollar to strengthen. “A strong dollar is in our nation’s interest, and currency values should be determined in open and competitive markets in response to underlying economic fundamentals,” Mr. Snow said Wednesday.

    That same day, the dollar hit a 28-year low against the Canadian dollar and a nine-year low against the South Korean won. Both the British pound, which traded at $1.8909 mid-afternoon yesterday and the euro, which bought $1.2885, are the strongest they’ve been in a year against the dollar. Measured against a Federal Reserve index of 19 major currencies, the dollar had slipped to 81.28 Friday from 85.17 in March.

    One reason the dollar is feeling pressure is a growing sense in markets that the Federal Reserve may soon pause in its campaign to raise interest rates, while central banks in Europe and Japan may be lifting their rates in the near future. Economists say that higher interest rates tend to strengthen a country’s currency because they draw in more investment.

    Mr. Snow and his team are naturally suspicious of the idea that governments can or should meddle with exchange rates except in extreme cases.

    Still, the protectionist sentiment sweeping Congress has forced the secretary to be more overt in his efforts to persuade China to allow the yuan to rise in relation to the dollar. The U.S. posted a $15.6 billion deficit with China in March, up from $12.9 billion a year earlier and by far the country’s single largest bilateral trade gap.

    U.S. exports to China rose during the period, to $4.96 billion from $3.31 billion, amid increased shipments of U.S.-made semiconductors and aircraft. But the increase was overwhelmed by a $5.29 billion surge in imports from China, to $47.321 billion, led by computers, computer parts and cellphones.

    Chinese officials have vowed to take steps to help correct the imbalance. Early last month, Chinese officials went on a buying spree in the U.S., signing long-term deals to coincide with President Hu Jintao’s visit to Washington. They’ve also promised to take steps to increase domestic demand in China for U.S.-made goods. But it may take months, in some cases years, for those pledges to translate into actual trade.

    Exchange rates have been the main focus of bilateral tension. This past week, Mr. Snow said he was “extremely dissatisfied” that China, which has taken some steps to make its rigid exchange rate more flexible, hasn’t gone further.

    Mr. Snow argues such a move would benefit China’s red-hot economy by helping it avoid a sudden crash. He also predicts that it would ripple through the other nations of East Asia that are keeping their currencies weak against the dollar and exporting heavily to the U.S. Implicit in his statement is a desire for a broad depreciation of the U.S. dollar against the currencies of the major economies of East Asia.

    Even so, Treasury officials couch their desire in such terms as “adjusting” or “flexibility.” They don’t talk about a falling dollar.

    Limited Ability

    The U.S. has limited ability to sway currency prices, whether through action or inaction. Last month, Mr. Snow orchestrated a joint statement of the Group of Seven major industrialized nations calling for “greater exchange-rate flexibility” in China and elsewhere in Asia.

    Not long afterward, Japanese Finance Minister Sadakazu Tanigaki, who had signed off on the statement, appeared to back away by talking down the yen and — by implication touting the dollar. “The G7 statement does not call for a depreciation of the dollar,” he said at this month’s meeting of the Asian Development Bank in India. “I’m worried that the market has misunderstood the G7.”

    Mr. Snow’s top international hand, Undersecretary for International Affairs Tim Adams, immediately fired back. “We should allow markets to set the values of exchange rates, and probably we should all refrain from not only intervening but commenting on exchange rates,” he said at the same meeting.

  18. calmo says:

    My goodness Michael & Shahid, I can’t say I’ve read a more weighty piece on Snow since his trip to China with Greenspan.
    Usually this piece of advice:

    Even the failure to speak out against the dollar’s decline could provoke a sharp market response.

    is what I heed when it comes to making remarks about our Secretary Treasurer, a position so precarious that it is still not known whether Bolten is looking for a replacement.
    Which is why I confine my remarks to speaking out about his eye brows and not getting folks uptight by suggesting that he is merely a waterboy for the WH.
    But the recent news about Rove/Cheney may add real meat to the view that the week’s market correction/dollar slide is not over –that there is more political (as opposed to economic) uncertainty than that housed in Adam’s retort:
    “We should allow markets to set the values of exchange rates, and probably we should all refrain from not only intervening but commenting on exchange rates,”

  19. Econbrowser says:

    Inflation and the Fed

    Certainly the recent inflation data have been– Dave Altig says
    insert something negative here, so I’ll just say “unwelcome”. But when Fed Chair Ben Bernanke declare…