We have been amused by the comments of treasury secretary Geithner earlier this week in Saudi Arabia regarding the USD.
“A strong dollar is in the interest of the United States. Of course, I deeply believe that,” Geithner said. “Our commitment … to the world and of course, the American people, is to make sure we’ll put in place the policies that can sustain confidence in this economy and this financial system.”
As long time students of political history we believe that political speeches/commentary is nothing more than propaganda. So we don’t take them too seriously. However, what we do take seriously is the underlying reasons for such “banter”. The mere fact that Geithner (and others) have had to resort to these “road show” tactics to support the USD says something in itself. It suggests that there are significant bearish forces at play which are known to the US treasury and not well understood by the general public. At a more micro level experience tells us that when management of a company consistently engage in practices to “talk up” the stock price of a company, more often than not, it ultimately results in disastrous consequences with a significant fall in the company’s stock price, sometimes even bankruptcy. Granted, a company is not exactly a country. However, the same principles apply. When it is all said and done a company is merely just one very big company. Actually many companies are bigger than most countries so perhaps lessons learnt from studying the behaviour of companies are equally applicable to countries. In any case we believe that a currency is to a country what a stock price is to a company. If the USD was genuinely strong, or at least its prospects were, then it is very unlikely that we would see a push by the US treasury/government to “up sell” the USD.
Let us listen to what the market is saying in light of Geithner’s comments? The USD Index has fallen since Geithner’s comments on the 14th of July. To us this is a bad omen. If Geithner’s “deep beliefs” and talking up efforts are not holding up the USD what will? Global capital flows continue to suggest that the USD Index is about to break to a new multi-week low. Just look at the behaviour of currencies like the Real, Rand, Aussie, and Kiwi to name a few:
The charts above suggest that the next big move is likely to be to the upside.
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