from Follow the Money

Lucky that the dollar is in the midst of a mini-rally …

March 23, 2005

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Because if the dollar was heading the other way, as the New York Times noted Wednesday morning, there is no one left at the Treasury to mind the store. Under Secretary for International Affairs John Taylor is now a lame duck. There is no Deputy Secretary. Secretary John Snow seems more of a salesman than a policy maker, and a lame duck too, for all intents and purposes.

The names of the expected nominees for Under Secretary of International Affairs and Under Secretary of Domestic Finance are well known (Tim Adams and Randal Quarles). But they have yet to be nominated, let alone confirmed.

[Update: Tim Adams’ nomination was announced today, along with the appointment of Arnold Havens as acting Deputy Secretary. I hope that a Quarles announcement follows soon. Quarles was the star of the first term Bush Treasury: even those who don’t always agree with his brief tend to think Quarles argues his case very well. Thanks to Praktike for the heads-up]

On the other hand, the absence of a confirmed Deputy Secretary or Under Secretary probably doesn’t matter much. The White House makes economic policy in the Bush Administration, not the Treasury. Tim Adams is unlikely to change that basic reality.

I confess to a bit of surprise at the strength of the dollar’s recent rally v. the euro. The (overdue) sell off in emerging markets, including some Eastern European emerging markets, seems to be playing a role, along with reassuring statements from the Hong Kong Monetary Authority. And, yes, higher US interest rates should support the dollar at the margin, particularly as weak European growth looks likely to keep European rates relatively low. But the roughly 90 bp yield pickup on 10 year Treasuries v. 10 year bunds does not strike me as all that big (the spread on two years is larger, a bit over 120 bp). The gains from the extra carry could easily be wiped out by any currency moves. Call me old fashioned, but I would want to see convincing evidence that at least the non-oil trade deficit has peaked and is heading down before making a big bet on the dollar. All the evidence, however, suggests the trade deficit is still rising.

Betting on the appreciation of the currency of a country with a growing current account deficit of more than 6% of GDP strikes me as intrinsically risky. Given the recent trajectory of oil prices, and indicators of strong US consumer demand in q1, anyone buying dollars should assume that the data releases for February and March will show an increase in the monthly trade deficit. And so long as non-oil import growth exceeds US export growth by a big margin, the deficit looks set to keep expanding during the course of the year. Slow growth in Europe may be good for US pride, but it is not good for US exports ...

More on the expected 2005 US trade deficit later.

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