Geithner misses lifeline, sinks dollar

by Frank James

Treasury Secretary Tim Geithner had been having a relatively good week until today.

On Monday, he introduced his detailed bank-rescue plan which financial markets greeted with a huge rally.

Yesterday, he did fairly well weathering congressional questioning of his role in the AIG bonuses affair.

But today he sent signals, apparently unwittingly, that the Obama Administration might not be all that into having the dollar as the world's reserve currency, a position that would have placed the administration at odds with its predecessors and remade the world of global currencies.

Geithner was asked about an article by the Chinese finance minister in which the Chinese official suggested the need for a new global currency. Geithner's response seemed to indicate he could live with that.

Here's an excerpt of the exchange:

Q Well, thank you. Wonder if you could comment on two related things.

One, the Chinese government proposal about a global currency; and about the IMF regulations that were -- the new IMF idea about, you know, very general agreements to borrow and having a faster ability to disburse to the (margin ?) markets...

SEC. GEITHNER: On the first question, I haven't read the governor's proposal. He's a remarkably -- a very thoughtful, very careful, distinguished central banker. Generally find him sensible on every issue. But as I understand his proposal, it's a proposal designed to increase the use of the IMF's special drawing rights. And we're actually quite open to that suggestion. But you should think of it as rather evolutionary, building on the current architectures, than -- rather than -- rather than moving us to global monetary union.

Fortunately for Geithner, the question and answer session was moderated by Roger Altman who was a senior Treasury official in the Clinton Administration. Altman immediately recognized that Geithner had slipped off the deck and was a man overboard, at least when it came to U.S. dollar policy. Altman tried to throw Geithner a lifeline.

MR. ALTMAN: Let me just follow that up for one second. A number -- I haven't read the governor's essay, either, but a slew of news reports interpreted his comments to suggest that the world needs a super reserve currency, and that the dollar, on some gradual basis, ought to be replaced in favor of that. And I wasn't entirely clear what your response was.

SEC. GEITHNER: Well, as I said, I haven't read his proposal, but I thought the initial reaction was sort of ahead of the details of the proposal I saw. The only thing concrete I saw was a reference to expanding the use of the SDR, but I look forward to reading his figures. As I said, I have tremendous respect for him. He's a really thoughtful, pragmatic guy, and he has a great record of credibility in China as a whole, so anything he's -- he's thinking about deserves some consideration.

It is very important just to underscore that the future evolution of the dollar's role in the system depends really primarily on how effective we are in the United States in getting not just recovery back on track, our financial system repaired, but we get our fiscal position back to the point where people will judge it as sustainable over time.

Geithner said a whole lot more blah, blah, blah. But he never said the magic words which Altman, to his credit, recognized.

So the question and answer session continued. Then, just before it ended, Altman returned to the dollar question. This time he did everything but answer the question himself for Geithner.

MR. ALTMAN: I'd like to ask one final question, in effect, on behalf of the market. It might be useful if you tried to clarify your earlier comment on the reaction to the central bank governor of China's idea, and so let me ask the question this way. Do you see any change over the foreseeable future in the basic role of the dollar as the world's key reserve currency, or the reserve currency?

SEC. GEITHNER: I do not. I think the dollar remains the world's dominant reserve currency. I think that's likely to continue for a long period of time. And as a country, we will do what's necessary to make sure we're sustaining confidence in our financial markets, and in the productive capacity of this economy and in our long-term fundamentals.

MR. ALTMAN: Thank you. I'd like to thank Secretary Geithner.

Those are words of relief from Altman that Geithner finally caught a clue.

Of course, the damage was already done. This is from The Wall Street Journal's MarketBeat blog:

Some have commented that whatever merits Treasury Secretary Tim Geithner may have, public speaking is not one of them. The dollar slumped dramatically against the euro, yen and other currencies after Mr. Geithner Wednesday said the U.S. is "quite open" to a suggestion from Chinese officials of a move to a "Special Drawing Right" linked currency system.

Oy. "Geithner is learning the hard way about the impact that his comments can have on the currency market and despite his attempt to pacify investors, his words have left an air of uncertainty in the U.S. dollar," writes Kathy Lien, director of currency research at Global Forex Trading.