Treasury Secretary Geithner kowtows to China on currency issue; U.S. dollar continues to take a beating against yen and euro

Oct. 7, 2010 | Written by Jeffrey Winograd

Geithner says no “near-term quick fixes” to avert possible currency war – Treasury Secretary Timothy Geithner in remarks on Oct. 6 effectively placed Chinese employment on a higher pedestal of priorities than U.S. job retention and creation. This is important for forex traders to keep in mind as they consider possible movements in the greenback. It is also important to note that his remarks came in the wake of a recent pronouncement by the Brazilian finance minister citing the danger of a global “currency war.” In his opening remarks at the Washington-based Brookings Institute, Geithner did not refer to China by name. The clash of exchange rate systems is “unfair to countries that were already running more flexible regimes and let their currencies depreciate,” Geithner said. But he let China off the hook by adding that the problem “requires a cooperative approach to solve because emerging economies individually will be less likely to move – to allow their currencies to move up unless they’re confident other countries will move with them.” It is universally accepted that China, by keeping the exchange rate of the renminbi artificially weak, is able to bolster its export sector and keep its employment rolls at a high level. According to Geithner, the “main problem” is having a set of emerging economies that remain undervalued and are fighting the pressures for appreciation. “This is not a sustainable strategy for them, with their trading partners or with the countries they are competing against,” Geithner said, again without calling out China. Finally, in response to a question about the Asian behemoth, Geithner could not escape mentioning the country by name. “China will be less likely to move, allow its exchange rate to appreciate more rapidly, if it’s not confident other countries will move with it,” he said. The exchange rate imbroglio “is the central existential challenge of cooperation internationally as it has been for a long period of time,” Geithner said, adding that the solution should not rest solely on the shoulders of the U.S. “It’s better for it to come in a multilateral context, not countries using us to help advance this issue because it is a sensitive, complicated thing,” he concluded.

Immediate outlook for greenback remains grim – The Japanese yen and the euro continue to pummel the U.S. dollar and the forex market is uncertain when the tide will significantly turn. At the moment, it seems that the so-called red line for another Bank of Japan intervention is not written in stone. There is widespread belief that a possible intervention is politically unfeasible before the conclusion of the Group of Seven meeting this weekend in Washington. Forex traders should keep a watchful eye on developments in D.C. The USD/JPY pair hit a 15-year low of 82.75 on Oct. 6. Looking to Europe, forex traders are awaiting developments at a 12:30 GMT news conference with Jean-Claude Trichet, president of the European Central Bank. On Oct. 6, the euro came within a whisker of hitting $1.40. In 2008, the euro hit its record high of about $1.60 while this past June it was at a low of around $1.1880. The euro will likely be bolstered by today’s news that German industrial production jumped 1.7% in August when compared to July. The downside to the strengthening euro could be weaker export demand that would be a potential body blow to the German manufacturing sector. On the other hand, disappointing U.S. employment figures from ADP on Oct. 6 and the possibility of a dismal Labor Department employment report on Oct. 8 could further dampen enthusiasm for the USD.