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Friday, March 14, 2008 4:33 AM


U.S. Dollar Intervention Madness


Paulson is once again talking the talk about the strong dollar.

"We've taken quite a clear position on this in saying that a strong dollar is in our nation's interest".

Paulson can talk all he wants and it won't matter one iota until Bernanke starts walking the walk. If Bernanke was concerned about the falling dollar all he has to do is raise interest rates. But everyone knows the next move is lower.

Intervention Watch

The slumping dollar has Morgan Stanley, Goldman On Intervention Watch.

"We're on an intervention watch," Stephen Jen, Morgan Stanley's London-based head of foreign-exchange research, said in a telephone interview. "While I don't think we have reached the threshold yet, the argument in favor of it is gradually becoming compelling."

"The dollar's fall will worry other markets, which are so fragile right now," Jim O'Neill, chief economist at Goldman Sachs said in a telephone interview. "Intervention will definitely be on the minds of policy makers."

Any action by the G-7 would be the first since its governments united in September 2000 to boost a falling euro. The dollar sank as low as 79.75 yen in 1995 to prompt a rescue then.

Since 2002, the G-7 has focused on lobbying China to stop meddling to weaken the yuan while leaving itself with some room to maneuver by noting its aversion to "excess volatility and excessive movements in exchange rates."
A Compelling Case

The idea there is a "compelling case" for currency intervention is complete silliness. However, a very compelling case can be made for
  • Abolishment of the Fed
  • Abolishment of central bankers in general
  • Sound monetary policy based on free market forces
  • Sound fiscal policy
ECB Adviser Promotes Intervention

Peter Bofinger, adviser to ECB, says Time For The ECB To Start Buying Dollars.
"The uncontrolled increase of the euro rate vis-a-vis the dollar threatens employment growth in the euro area," said Peter Bofinger, one of Germany's so-called "five wise men" appointed to advise the government on economic matters. He told Forbes.com that the ECB had an obligation to oversee growth, and that it had to act now--alone if necessary--to stop the euro from rising further.

But although the European Central Bank has so far refused to budge from its own key rate of 4.0%, citing its primary goal of fighting inflation, Bofinger argued that the bank still had the power to tame the euro's rise. He said the ECB could intervene in the foreign exchange markets to buy more dollars, preferably in conjunction with other central banks like the Federal Reserve or the Bank of Japan.
Anyone promoting currency intervention as an economic policy is a fool not a wise man. Furthermore it should be blatantly obvious that ....

Currency Intervention Cannot Possibly Work

As long as the US keeps spending money it does not have on things it does not need and cannot afford, the dollar is going to be weak. If Paulson does not know that he should be fired. If he does know that he should have the integrity to come out and say it.

If the US wants a stronger dollar all it has to do is eliminate the budget deficit. If it wants lower oil prices all it has to do is eliminate the deficit, get out of Iraq, and stop wasting oil on needless military missions.

It's that simple but sadly no one in either party other than Ron Paul is willing to make those kind of statements. Instead the silly talk goes on and on.

Dollar Sinks To Record Low

Bloomberg is reporting Dollar Falls to Record Versus Euro, Near Decade Low Against Yen.
The Dollar Index traded on ICE Futures in New York, which compares the currency to those of six trading partners, fell to a record low of 71.731 today. The decline in the world's reserve currency pushed gold above $1,000 an ounce for the first time yesterday as investors sought shelter in the metal.

"With stocks falling, traders are rushing into yen- buying," said Takeshi Tokita, vice president of foreign- exchange sales at Mizuho Corporate Bank in Tokyo, a unit of Japan's second-largest publicly traded lender by assets. "There are some rumors hedge funds and banks will go into bankruptcy."
Carry Trade Unwinds

A rising Yen is synonymous with an unwinding of the carry trade. A rising Yen and has also consistently tracked the $SPX in inverse fashion for over a year.



click on chart for sharper image

I have called for a stronger Yen and got it.

However, I sure did not get an expected rise in the dollar vs. the Euro. One of the reasons is Trichet has been incredibly stubborn in refusing to cut rates while Bernanke has been in an absolute state of panic cutting that is not doing one bit of good.

I do not know how much longer Trichet can hold out given that the German banking system like its US counterpart, is in shambles and property bubbles are imploding in various parts of Europe.

But heaven help us if central bankers try to address horrid US fiscal and monetary policies with currency intervention. Currency intervention cannot work, and failed attempts will simply add further stress to the extremely fragile system.

It's important to remember: Crashes do not occur in overbought conditions, they occur in oversold conditions. While not specifically calling for a crash here, these are the kinds of situations in which one can easily occur.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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