Printer Friendly

eMail Article

May 30, 2006

Treasury Sec Paulson: The Defensive Choice
by Ashraf Laidi

Hank Paulson's nomination as Treasury Secretary may provide some temporary relief for the sliding dollar owing to Paulson's prominent status as a former of a top Wall Street firm. But we doubt that Paulson's role at the Treasury in the next 2½ years will alter the current and emerging fundamental challenges to the US currency.

Considering Paulson's Wall Street experience and credibility, we regard his appointment more of a defensive measure to prevent the dollar's downtrend from accelerating into an uncontrollable pace, considering the endogenous and exogenous factors starting to weigh on the US currency. Similarly, the Paulson choice should also prevent the already sliding stock market from succumbing to further pressures -- pre-midterm election uncertainty, risk of renewed policy tightening by the Fed and an expected decline in US growth (we expect Q2 GDP growth to slow to 2.5-2.7%).

Just as the Bernanke Fed is conscious of the dollar repercussions of communicating an explicit conclusion to the 2-year old policy tightening campaign, the US administration has grown conscious of the market realities acting against the US dollar, leaving it no choice but to resort to a figure of credibility. This is not to say that the US Administration will pursue a strong dollar policy in both practice and preach as was under the Clinton-Rubin-Summers years, but will instead aim at pursuing a competitive currency without lacking in confidence.

The chart above shows the overwhelming relation between the backgrounds of former US Treasury Secretaries and the value of the US dollar during their terms. While former US Treasuries with a Wall Street background served during periods of dollar strength (Bill Simon of Salomon Bros in 74-77, Donald Regan of Merrill Lynch 81-85 and Robert Rubin of Goldman Sachs 95-99).

The general rationale has been for Secretaries with considerable experience in Wall Street have supported or served during a period of a strong dollar, which is in line with shoring up foreign interest in US assets. Treasury secretaries emerging from an industrial background, or those with considerable policy experience have generally preferred a weaker dollar so as to boost the priorities of local industry and employment.

Considering Paulson's international experience, his selection also reflects the White House increased prioritization to international finance considerations (pressing on China FX revel before the midterm elections, working with G7 on imbalances) rather than on domestic policies (failed pension privatization, passed tax cuts), a Secretary with an international pedigree would be essential.

Ashraf Laidi
Forexnews.com

Forexnews.com was created in January 1999 and is committed to enhancing public knowledge about the foreign exchange markets. The site offers the latest insights and analysis in currency markets, freely available to traders and researchers alike.

Forexnews.coms unique combination of fundamentals and technicals, along with its pioneering approach to the FX market, gives it the information edge. Forexnews.com is the longest-standing on-line source of credible, timely and accurate information in FX world.

Forexnews.coms staff of analysts has gained recognition from highly placed media sources, both inside and outside of the US. Its analysts are regularly cited in Bloomberg TV, Reuters TV, The Wall Street Journal, Barrons, The Financial Times and Investors Business Daily.

Copyright © 2005-2006 Forexnews.com

Image rendition and html coding Copyright © 2000-2008 SafeHaven.com

« BullionVault.com -- Buy gold online - quickly, safely and at low prices »
« Honest Money: A History of U.S. Gold & Silver Currency -- by Douglas V. Gnazzo »

« Opinions expressed at SafeHaven are those of the individual authors and do not necessarily represent the opinion of SafeHaven or its management. Articles are available via RSS/XML. Please visit RSSHelp for instructions. »