“The dollar is our currency, but your problem,” John Connolly, Richard Nixon’s Treasury Secretary famously said. Unfortunately, the financial isolationism of times past by the United States is not going to acceptable to the rest of the world, but rhetoric will not be the solution. Financial leaders are starting to rise up and complain that the dollar decline has gone on too long.
Yesterday, Japanese Prime Minister Fukuda talked about the yen appreciating "too fast" and speculators needed to "be careful" to avoid the possibility of intervention. ECB president Trichet commented last week on the brutal move of the dollar and this should not persist. Anonymous Canadian officials are stating that they are bearing the brunt of the dollar decline and will discuss this at the G20 meetings. President Bush is “satisfied that we have a strong dollar policy” but that the market is the best place to set exchange rates. G20 meeting will be held in Cape Town this week and should have lively discussions on the currency markets, but discussions without action will not change the course of the dollar.
Does this rhetoric matter? In the short-run, yes. The talk of policy-makers will increase volatility and causes some changes in the direction of exchange rates but these changes will be short-lived. These comments may even reduce the view that the dollar decline is a one-way bet, but fundamentals will make the difference in trend. Until there is more clarity on the credit crisis and whether inflation will be controlled, the dollar decline trend will continue.
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