Will You Please, Be Quiet, Please?

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.
Geithner
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.

With the Chinese of late making plenty of noise about U.S. borrowing and spending and the health of the U.S. dollar, officials in the U.S. would be expected to push back against that. President Barack Obama did as much in his press conference Tuesday, saying that the dollar was fundamentally strong, and that there was no need for another reserve currency.

With markets, it remains easy to take things out of context quickly. The Treasury secretary was responding to a proposal made by Zhou Xiaochuan, China’s central bank governor, who earlier this month said the world should consider using the IMF’s Special Drawing Rights basket as a super-sovereign reserve currency. Mr. Geithner admitted to not reading the proposal, but added that he was “open” to the suggestion to increase the use of the IMF’s drawing rights.

That’s not quite the same as saying the dollar is no longer the world’s primary reserve currency. SDRs are a basket of currencies issued by the IMF, and “given the deflation threat and the liquidity crisis a new SDR issuance may make sense, but it does not take away from the dollar’s role,” says Marc Chandler, head of forex strategy at Brown Brothers Harriman.

Mr. Geithner then tried to walk back his comments, saying, “the dollar remains the world’s dominant reserve currency. I think that’s likely to continue for a long period of time.” He added that “as a country we will do what is necessary to make sure we are sustaining confidence in our financial markets.”

To be sure, it’s not as if Mr. Geithner is the first Treasury Secretary to have trouble with communication. George W. Bush’s first Treasury head, Paul O’Neill, had a number of strange statements that markets reacted poorly to, and his second man at the helm there, John Snow, remarked early in his tenure that the dollar’s fall made economic sense, which accelerated the selloff. Even smooth operators like Robert Rubin were not immune.

Still, it’s clear Mr. Geithner, right now, is not the most artful when it comes to public speaking. It isn’t the first time, as a previous statement about China being a currency manipulator roiled bond markets. The euro rose to a high of $1.3649 after Mr. Geithner’s initial comments, and later retreated to $1.3550. The dollar fell to 96.93 yen, but recovered somewhat, and was at 97.53 yen.