We need a stronger USD

Lately, Asian central banks have been actively propping up their own currency against the USD to counter inflation effects due to the spiralling of oil prices. The USD in the meantime has been appreciating too, probably due to the speculation that the Reserve Bank will soon intervene in the weak USD. Will it intervene is a USD million dollar question! Currency intervention is an option for the US Federal Reserve as its hands are tight at this moment to start raising interest rate again. Based on current situation, I would say most central bankers would prefer to appreciate their currency rather than raising interest rate.The US economy needs to recover and it is not the right time now to change its stance from monetary loosening to tightening policy so soon. As the economy is still weak, the Federal Reserve is most likely to leave the interest rate unchanged while keeping its fingers crossed for the economy to pick up steam from here on. Although we have to also consider the demand factor, I have always believe a stronger USD is one of the way to counter rising crude oil prices etc besides regulating the futures markets and slowing down money supply.(Have discussed here and here previously). The current oil prices does look like a bubble rather than a hot air balloon to me and if "things" falls into place, we may see a temporary sell down of oil soon. Unfortunately, I believe the stock markets would be drag down by it as well since the losses from commodities trading will probably be settled via selling of shares. I hope to be proven wrong then. Below is an interesting write up which mentioned about the possibility of intervention in the USD and the significance of G7 meetings on the USD.

DailyFx: There has been a lot of speculation about the possibility of currency intervention in the US dollar. In the past year alone, the US dollar has fallen 15 percent in value against the Euro, 18 percent against the Swiss Franc and 13 percent against the Japanese Yen. Over the past 3 years, the decline has been more than 25 percent. Interestingly enough, the prospect of intervention is more real than it was back in April, when the US dollar hit a record low against the Euro. What changed? Inflation. Last week, oil prices climbed to an all time high of $139.12 a barrel, sending inflationary pressures skyrocketing. Central banks around the world turned aggressively hawkish as the threat of higher prices solidified their need to focus on containing price pressures. Even the Bank of Canada has succumbed to higher inflationary pressures – they were widely expected to cut interest rates by 25bp this morning, but they opted to leave interest rates unchanged at 3 percent instead.

Clear and Cohesive Message from the Bush Administration: Stronger Dollar

Over the past week, the Bush Administration has sent a surprisingly clear message to the markets about where they want the dollar to head. The comments from 3 important people represent clear cohesion within the Administration, who has come out with all guns blazing:

Last Tuesday, Federal Reserve Chairman Ben Bernanke broke from tradition and talked about currencies. He drew links between the weaker dollar and higher import costs and consumer price inflation. His cohorts including Fed President Geithner confirmed that the central bank is paying “very close attention” to the value of the dollar. On Monday, US Treasury Secretary Paulson said that he would not rule out any policy tool including currency intervention. Last night, on Airforce One, President Bush told The Times London that “we want the dollar to strengthen.”

Stopping Short of Physical Intervention?

The last time that the Federal Reserve intervened in the currency markets was shortly after the launch of the Euro. At that time, the currency fell to a low of 84 cents, triggering panic for the European Central Bank. In response to the sharp sell-off in the EUR/USD, the ECB convinced the Fed to jointly intervene in the currency markets to buy euros and sell US dollars. Since then there has been no intervention for more than 7 years, which means that stepping into the markets at this time would represent a dramatic policy shift for the US government.

The Alternative: Verbal Intervention at G7/G8?

The alternative on the other hand may be verbal intervention at this weekend’s G7/G8 meeting. Given that the weakness of the US dollar has been one of the primary reasons why food and energy prices have skyrocketed, a stronger dollar may be in everyone’s best interest. Or is it? For the US government to support dollar strength, half of the battle for verbal intervention may have already been won. However, it is the European Central Bank that really needs to be convinced. With the ECB on a mission to do all that it takes to lower inflation, they may not be willing to let the Euro weaken. Over the past 30 years, G7/G8 meetings have marked major turning points for the US dollar.According to the following G7 chart, significant tops and bottoms have coincided with a significant change in the foreign exchange language of the G7 communiqué. For example, following the Dubai meeting in 2003, the Group of Seven called for more “flexibility in exchange rates.” Although this criticism was directed at China and Japan, it came on the heels of a strong dollar rally. The decline of the US dollar during the late 1980s was also halted when the Louvre Accord was signed in 1987 at the G7 Minister of Finance meeting.... Bear in mind though that the upcoming meeting will only be attended by Finance Ministers and not central bankers. Therefore it remains to be seen whether changes will be made without the presence of the ECB and the Federal Reserve.

* Petronas pretax profits - RM42.3b(6 mths to 30 Sept 07), RM76.3b (12 mths to 31 March 07). Its full year 31 March 08 results is due out end of this month.

* The savings from the lowering of petrol subsidy of RM13.5b will be used as follows:-RM7.5b(subsidise petrol, diesel, gas and cash rebates), RM4b(improving food security) and RM1.5b(cooking subsidy).

* US Treasury Secretary Henry Paulson does not think speculators were playing a major role in driving up global oil prices. His statement is similar to the one made by the US State Energy Minister earlier.

* June 22 - will the meeting in Jeddah, Saudi Arabia between oil producers, consumers and oil companies yield any desired results? They will discuss amongst others the jump in oil prices, its causes and how to deal with it objectively.

* German Chancellor Angela Merkel says that Continental Europe should take the lead in devising new rules for financial markets because the Anglo-Saxon model of regulation has failed. She particularly mentioned that European credit ratings agencies to counterbalance the dominance of Moody's and S&P's.