http://www.economist.com/agenda/displayStory.cfm?story_id=2098722snip
None of the noises coming from Capitol Hill suggest that the markets are wrong in this view. This week, Medley Global Advisors, a consultancy run by Richard Medley, a former advisor to George Soros and a man with strong links to administrations past and present, issued a report saying that it was indeed the government’s intention to push the dollar lower. And a junior apparatchik in the Treasury claimed that, specifically, it wanted to lower the value of the dollar against the yen (since the Chinese are unlikely to play ball). Thus has the strong-dollar policy long espoused by Robert Rubin, Bill Clinton’s treasury secretary, metamorphosed into a weak-dollar policy. Mr Rubin, a former boss of Goldman Sachs, and as safe a pair of hands as could be wished for in troubled times, is said to be spitting blood at the stupidity of such a move.
Unfortunately, there is no one of Mr Rubin’s calibre close to Mr Bush; no one, indeed, in whom financial markets place much trust at all. Mr Bush has surrounded himself with businessmen such as Mr Snow and the likes of Karl Rove, his chief political advisor and a politician to his bones. Mr Bush wants to get re-elected, whatever the cost. One of the biggest threats to this is the “jobless recovery”, which is being linked politically (regardless of any economic arguments to the contrary) with the trade deficit. Politically it plays well to bash foreigners (particularly the Chinese, the new whipping-boys) for “rigging” their currencies. Protectionist noises are becoming louder by the day. Legislation has been introduced in both houses of Congress that would slap hefty tariffs on Chinese imports. Congressmen in both parties are in favour and if anything the administration is egging on such sentiment. That factory employment has in fact been falling in America for the past 45 years is being ignored.
Though such rhetoric plays well with voters it has played very badly indeed with financial markets for the simple reason that such measures would undermine growth, not just in Asia and Europe but in America too. China is very unlikely to unpeg the yuan from the dollar. But other Asian countries have currencies that float more or less freely, and the yen has been floating upwards. Fears are rising that a strong yen (or other Asian currencies for that matter) will stifle growth everywhere, and stockmarkets have taken a bashing since the G7 announcement. Japan’s stockmarket, by way of example, has fallen some 6.5%.
snip
The new, politicised weak-dollar policy is scarcely likely to make them <i.e., foreigners> want to add to this <their Treasury holdings>, and may even encourage them to sell some of those that they already hold. A big sell-off would mean plunging Treasury prices and thus their yields would rebound and more from their recent falls, leaving America with higher financing costs, the last thing its fragile economy needs. “As far as I or any of my friends can tell
there is no one remotely close to the president that knows about international finance,” says one of Buttonwood’s old friends, far more senior than he. It shows.
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