Secretary Paulson: Support the Dollar Now

After a boomerang 266-point rally in the Dow Industrial Average Tuesday on the heels of a nascent U.S. Dollar rally, further extension of the crude oil mudslide, and a domestic stock rebound, there are still pundits a-plenty touting that the move in the local currency is a result of European economic weakness, not U.S. strength. That may be well and true but there is one weapon left in the arsenal that could change all that. Treasury Secretary Hank Paulson could put on his sheriff's hat, in the spirit of ol' James Garner, and announce active support of the U.S. Dollar.

Sound far-fetched? Similar currency interventions have occurred before. In fact, just recently, in June, Secretary Paulson himself refused to "rule out" dollar intervention, suggesting he might support the buying of dollars through proxies on Wall Street.

Such a tactic would probably involve selling gold as well, as was done by the London Gold Pool in the 1960s. Normally this would be viewed as bullish for gold long-term, as traders and investors would see this as an inherent sign of weakness for the dollar. Why would now be different? Because presently the dollar is rallying. By giving this nascent move a kick in the afterburners, a bottom could be put in the currency and a potential top in the commodity markets.

Obviously, this sort of plea does little for us as investors or traders unless we actually get action. I am long the U.S. Dollar but the position is largely ceremonial. The bigger benefit is to the U.S. economy and by proxy, U.S. stocks. In the past, this sort of intervention has made a difference. When the U.S. bought dollars between 1992 and 1995, it ultimately help mark the bottom in the currency. Note that the economy and the stock market underwent a period of unprecedented growth during this period. The dollar didn't roll over again until 2002.

The U.S. Treasury has also helped manipulate other currencies, to the detriment of the dollar, including buying the Japanese Yen against the dollar in the early 1990s. Using the dollar intervention tool again here, instead for our benefit, ala 1995, could have dramatic, positive effects on the economy.

Needless to say, there is a crucible of dynamic market forces at work presently in the financial system. The price of crude oil is rolling over after setting a peak of 148 dollars just weeks ago. This coincides with a massive correction in natural gas. Gasoline futures are plunging. Many other commodities, such as corn, have also seen parabolic moves. The Euro is rolling over on a sudden decline in Eurozone growth. Financials and homebuilders are nearing the back-end of a bloodletting from years of credit excess. Interest rates are low, real rates are negative - the Fed would love nothing more than to raise them. All of the dominos are in place.

A strengthening dollar would boost foreign investment into our markets, strengthening consumer and financial confidence, and re-establishing the U.S. as the nation to lead the globe out of an economic downturn.

Right now the rally in the dollar is nothing more than a "reaction" to these forces. However, with a fresh "buyer" - namely the United States Government - the move could take on a momentum of greater proportions. Our Federal Reserve, Treasury and SEC seemingly have no compunction whatsoever when it comes to interfering in the "free" markets. (Yes, that was sarcasm.) So the Treasury should have no issue performing a task it is familiar with, and stepping in to support the local currency as it has before in the past.

Strategic timing has long been a tool utilized by the Federal Reserve and the Treasury when undertaking market actions. The timing couldn't be more "strategic" right now.

While I am largely talking my book here, there is no question that the effect of dollar intervention on the health of the U.S. economy would be far greater and far more important than the benefit to any one trader betting on a change in the exchange rate.

However, as always there is a way to play this trade - simply buy shares or calls in UUP, an ETF that tracks the upward price of the U.S. Dollar. Owning shares in homegrown, domestic stocks also does the trick.

Disclaimer: The author is riding the current rally in the U.S. Dollar and the decline in oil via calls in the UUP (U.S. Dollar Index Bullish Fund ETF).

Comments

[dieuwer:]

It's called jawboning.

2008 Jul 30 08:15 AM

[EUARTE:]

There is no chance that the government will support the dollar. There is a mindset in Washington to have a Weimar currency.

2008 Jul 31 09:40 AM

[xsuddensam:]

Hmmm.........

I only keep enough dollars around to pay my bills.

2008 Aug 01 06:04 AM