Time for Some Treasury Dollar-Defense

With the dollar rising all of a sudden, and commodity prices plunging, this would be a great time for the Treasury to get out there and buy dollars. Totally squeeze the short sellers. Right now. Send a clear statement that the U.S. wants a stronger dollar. It would do a lot to reduce inflation expectations. And it would drive gold prices down $200 from here.

On the fifth anniversary of the Battle of Iraq, this kind of dollar defense would be a definitive statement that neither the United States nor its currency is weak. Folks betting against America would be proven wrong.

This would also be a great time for Sen. McCain, who is traveling overseas, to talk about a strong dollar — both for financial reasons and to promote American prestige. It would underscore that the U.S., despite its temporary economic slowdown, is not weak in any way.

The Fed helped the dollar and hurt commodities by its “less is more” policy decision Tuesday, where they cut the fed funds rate by 75 basis points instead of 100. They also devoted more attention to the inflation threat in their policy statement. Meanwhile, two Reserve Bank presidents — Dick Fisher in Dallas and Charlie Plosser in Philadelphia — dissented from the 75 basis point cut due to their concerns over inflation.

The Fed is coming to the end of the easing road. They are laying the groundwork for a sounder greenback. Now’s the time for the Treasury to come in and punctuate the change in Fed policy and commodity- and currency-market sentiment.