In his confirmation hearing with the Senate Finance Committee, Treasury Secretary Nominee Tim Geithner said that a “strong dollar is in America’s National Interest.” As potential Treasury Secretary, we expected Geithner to adopt the stance of his predecessors, which is to pay lip service to the strong dollar policy. Over the past few years, the consequences of the US government’s fiscal and monetary actions is a weak and not strong dollar. For any country that is slowing or in recession, a weaker currency is more helpful than a strong one.
So there is no real meat to Geithner’s comments especially as the Federal Reserve embarks on their “credit easing” policies. It would also have been a mistake for Geithner to say anything otherwise about the dollar at his hearing because rocking the boat could risk his confirmation.
Geither Turns Up the Heat on China
More significantly, he also suggested that the Obama Administration will may be saying goodbye to the buddy versus bully approach to China. He believes that Obama will “aggressively try to change Yuan policy” and that China will no longer get a free pass in trade violations. Geithner went one step further by saying that Obama believes that China is “manipulating” its currency and therefore the new President wants currency realignment. This represents a dramatic departure from the Bush Administration’s strategy. Former President Bush and former Treasury Secretary Paulson have allowed China to appreciate the Yuan on their own terms and to a large degree it has worked because over the past 3 years, the Yuan has risen more than 15 percent. It is still undervalued by at least 10 percent but China is not one to buckle down to political pressure even if it comes from Obama. This is a bad time to ask for Yuan stregnth because growth in China has slowed materially. If the US brands China as an official currency manipulator it will be interesting to see what type of backlash or economic war comes out of it.
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