Monday, May 15, 2006

U.S. Quietly Hopes Dollar Drop Eases Trade Gap

Why won’t the Treasury make their dollar policy clear? It’s our money; the stuff in our wallets and purses. It’s also the world’s reserve currency.

I would argue that it’s time to “strengthen” the dollar’s value, not reduce it. Market worries over inflation have been rising, not falling. Breakeven TIPS spreads have been widening.

The dollar has lost 7 percent against the Euro and the Yen since the beginning of April. The Euro is currently 1.28 against the dollar and the Yen is 110.

Even though gold and commodities are finally correcting lower, the incredible run they’ve had does raise fears of excess money creation, the principle source of inflation. Plus, the Federal Reserve’s policies to contain inflation look to be in conflict with Treasury policies that may create inflation.

But most of all, the Treasury Secretary should be more transparent. A stealth dollar depreciation is something that should be well discussed and debated. If it’s true, it’s a very big deal.

And by the way, the linkage between dollar value and trade deficits is very weak. Remember in the 1990’s, we had a very strong dollar coupled with a very large trade gap.

In fact, a dollar depreciation policy might actually inflate the U.S. economy, while a Chinese Yuan and Asian-Japan revaluation policy might deflate those economies.

Is this really what we want?