G8 Meeting in Osaka June 13 Not Accord Setting Gathering

With Bernanke dropping a bomb on dollar bears Tuesday, I have read in a number of places about the upcoming “G7” meeting in Osaka as a potential launching pad for a dollar accord rocket. The problem here is G7 is really G8 and only finance ministers…no central bankers attend…and it is designed to pen an economic statement for the heads of state meeting that follows in July. G8 includes Russian finance minister plus G7 and Eurogroup Chair. No central bankers no accord.
With Bernanke dropping a bomb on dollar bears Tuesday, I have read in a number of places about the upcoming “G7” meeting in Osaka as a potential launching pad for a dollar accord rocket. The problem here is G7 is really G8 and only finance ministers…no central bankers attend…and it is designed to pen an economic statement for the heads of state meeting that follows in July. G8 includes Russian finance minister plus G7 and Eurogroup Chair. No central bankers no accord.

Euro policy is a mainly ECB venture though Eurogroup is involved. Can an accord on the dollar emerge from a G7 meeting without the ECB there? Or the Fed for that matter even though the Fed has no direct role in fashioning US dollar policy?

I think the latest ratcheting up of urgency over the weak dollar by Paulson and Bernanke faces some serious tests ahead.

First test that comes to mind is put up or shut up. Verbal intervention needle runs to empty fast without some shift in Fed policy (beyond confirming the Fed is on hold) or currency intervention (where success is often a function of central bank policy shifts). We can rule out Fed tightening ahead…the banks need positive slope to the yield curve to recapitalize a la Japanese banks in the 1990’s and the US economy remains seriously challenged on many fronts from high commodity prices to falling home values, not to mention a credit crunch. One of my reasons for why currency intervention is suddenly an option…albeit not a likely option. In the seven years Bush has occupied the White House this is the first time that I can say currency intervention is a measureable risk.

Second test is Thursday’s press conference/ECB statement…will Trichet play ball with Bernanke and Paulson and stress that ECB rates are appropriate even with the run up in HICP in May to a record 3.6% while reiterating that it is key to read the remarks of US officials on the dollar. This is well short of an accord but it would be a departure from how Trichet responded to US Treasury efforts in late April to point out to the press (FT first) that the Bush admin was serious about no mas (non plus) on dollar weakness…Trichet sacrificed this message on the alter of inflation at the May ECB governing council press conference.

The third test is Friday’s US jobs data for May and non-farm payrolls in particular (NFP is like buying a car solely based on a picture of a door panel). US fundamentals still stink…financials, home prices, autos, airlines, retail and now state and local government (forget about that 20K plus a month add in jobs from this sector…more like a sign change needed for this assumption). Hard to see how the Fed and Treasury can will the dollar higher when US fundamentals are not cooperating, even in an ugly contest against the euro (trust me this is all about euro and dollar, not yen and dollar…fight for reserve currency status…yen is not even a runner up).

My bottom line is the Fed and Treasury are going to learn quickly that if you go all in on a higher dollar you better be holding at least an intervention card and be ready to show it. Otherwise it is back across the deck of USS Dollar and Bernanke’s date with dollar policy will be forgettable.

David Gilmore.

Foreign Exchange Analytics has it's roots in both the emerging information technologies and the global economy that characterized the last two decades.  As currency transaction volumes soared in the wake of the 1985 Plaza accord, the need for timely concise information on what forces were driving and would drive exchange rates became critical.   David Gilmore was one of a new breed of analyst that saw a void of relevant, market moving... More