T/FONT>o his chagrin, US Treasury Secretary Paul O'Neill caused the dollar to plunge on Wednesday with his testimony before the Senate Banking Committee.
And the funny part is that O'Neill was doing everything he could to not talk about the dollar -- welcome to the world of foreign exchange, Mr. Secretary.
PHOTO: AP
Even before O'Neill testified Treasury was trying to duck talking about the buck. Treasury spokeswoman Michele Davis started to pave the way when she said "the prepared text for the hearing will have no mention of the dollar because there's nothing new to say on the dollar."
Yet once inside the chamber, it seemed as though O'Neill couldn't stop talking about the dollar. Then, as they said in the 1960s, he blew his cool by denouncing foreign exchange trading.
An exact quote: "The people who benefit from roiling the world currency markets are speculators and as far as I'm concerned they provide not much useful value to the furtherance of advancing the cause of improving living standards."
As for his testimony, O'Neill wanted to be careful not to give these market-roiling traders any "ammunition." Hmmm. As luck would have it, Malaysia's Prime Minister Mahathir Mohamad is planning a trip to Washington on May 13. Maybe O'Neill should invite him to lunch. These two might have plenty to talk about as both seem given to outbursts challenging the social worth of currency trading.
O'Neill appears to be genuinely aggravated that currency traders read things into his commentary concerning the future course of US foreign exchange policy. Quoting him again: "There's apparently some breathless anticipation that I'm going to say something to intentionally indicate a change in policy, position or direction."
So here we are with yet another finance minister who thinks the foreign exchange market is full of socially undesirable, low-life speculators. And this is now coming from O'Neill who is an otherwise careful thinker about economics and should know better.
Well, Mr. Secretary, foreign exchange traders listen carefully to everything finance ministers and central bankers say because their words move markets. Imbedded in this constant stream, economic platitudes and bureaucratic babble sometimes are important signals about changes in economic and exchange rate policy.
And the onus is back on the ministers and central bankers because most of them have at times in their careers made intentionally obtuse statements designed to baffle or maybe even trick foreign exchange traders.
Ministers think it is their God-given right to manipulate the foreign exchange market anyway they can. And if they can do it with words, all the better since they then don't have to spend any money to get what they want.
Too bad O'Neill went on this rant. The prepared statements released by the Treasury Department were actually coherent and defensible.
Most of what O'Neill has done and said has been refreshing, especially coming from such a senior Cabinet officer.
Back to the hearings. Senate Banking Committee Chairman Paul Sarbanes was breathing fire over the high-flying dollar.
And try as hard as he could, he couldn't budge O'Neill on the dollar. Sarbanes, it seems, is a current account deficit groupie. The current account is the difference between how much the US imports and exports. Since the US imports far more than it exports, the current account is said to be in deficit.
That is something that clearly frosts Sarbanes's pumpkins.
He was especially frosted at O'Neill's calling the current account deficit "irrelevant." Of course this goes back to Sarbanes's deeply held conviction that the value of the dollar internationally puts American manufacturers in an "incredible position."
So what does Sarbanes want to do about it? "I think we have to look at the Plaza accords again." He was referring to the 1985 agreement by industrialized nations to conduct coordinated intervention to lower the value of the dollar.
O'Neill rejected Plaza II stating that currency interventions are likely to be "completely squandered." Whatever that means, he is right. They are not going to do what Sarbanes wants.
But you know what? All this kibitzing between O'Neill and Sarbanes sent the dollar into a free-fall. Now we see who's truly roiling the currency markets.
David DeRosa, president of DeRosa Research & Trading, is also an adjunct finance professor at Yale School of Management and the author of ``In Defense of Free Capital Markets.'' The opinions expressed are his own.
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