Breaking the Silence

Fed Chairman Ben Bernanke and ECB President Jean Claude Trichet are arguably the two most influential financial honchos around. As the global economy emerges from the worst recession since WWII, both leaders are stressing “the need” for a stronger dollar in order to stabilize international trade and prices.

After sealing his lips on the dollar’s value in the most recent G20 meeting, Bernanke finally broke the silence in his speech at the Economic Club Luncheon, in New York last November 16. In a rare remark regarding the USD, he noted that the weak currency was raising domestic prices and that the Fed remains “attentive to implications of changes in the value of the dollar.” Understandably, the increase in input prices due to a weak dollar would be transferred to consumers at the end of the day. He added that the bank will keep on putting together monetary plans that would promote price stability and employment.

Meanwhile, ECB President Jean-Claude Trichet joined the “Go USD!” parade as he supported Bernanke’s pro-dollar stance. In an interview for French newspaper Le Monde, Trichet emphasized the importance of Bernanke’s comments pushing for a stronger dollar, saying that it was in the world’s best interest. Hmm, when Trichet says “world”, is he merely referring to his 16-nation domain?

There’s no use denying that a weaker euro (as a result of a stronger dollar) will benefit the euro zone, more specifically in its trade sector. Judging from the latest euro zone trade surplus which was buoyed by a 5.5% surge in exports, the recent strength of the euro doesn’t seem to pose an immediate threat. Still, Trichet seems to be intent on capping the euro’s rise in order to boost, or at least sustain, global demand for euro zone’s products.

But does the world really “need” a stronger dollar for it to recover or is this simply the product of selfish ulterior motives? These Western superpowers seem to be attempting to prevent the rebalancing of power, of international trade flows from the West to the East, from happening. The stronger the dollar gets, the more attractive importing becomes and therefore, giving the chance for Americans to return to their old bad spending habits.

Are the two economic superpowers, US and euro zone, just jawboning the rest of the markets for a stable greenback? They keep stressing the importance of a strong dollar during this time of recovery but we have yet to see them take concrete action. If a strong dollar is indeed vital to achieve sustainable global economic recovery then why haven’t they acted upon it? Even if the ECB tends to be on the conservative side of the fence when it comes to monetary policy, the Fed certainly isn’t. These are the two strongest financial institutions in the world and, if they wanted, could come up with a grand plan resuscitate the dying dollar.

Now, the questions I ask are these: How will all these pro-dollar talks affect the currency markets? Can the mighty words of Bernanke and Trichet keep the dollar pumped up? Or will investors and traders keep selling that weakening dollar?

Reaction to Bernanke’s comments earlier this week suggests that traders are smartening up after seeing that Bernanke’s words lacked any punch. If Bernanke really wanted to strengthen the dollar, would he follow through by convincing the Fed to raise interest rates and withdraw its stimulus packages?

What about the euro zone? We’ve got ECB members stressing that the central banks has to be ready when the time for withdrawing stimulus comes. But wouldn’t withdrawing the stimulus boost the EUR further? Quite a dilemma, eh?

Given the recent cautiousness that Fed officials have been expressing during the recent months, I am still skeptical that this will happen. Traders and investors will probably remain bearish on the dollar, especially with more and more signs that recovery is on the horizon. The only way I see the dollar gaining is if the big boys actually do something – ANYTHING – that suggests that they mean business. Look at what happened following Bernanke’s comments – traders first bought up the dollar but was then sold to a 15-month low versus a basket of 16 other currencies. So if Ben and Jean really want a strong USD, they should quit the jawboning – don’t talk the talk if you can’t walk the walk!

Of course, that’s easier said than done. After all, they have the fate of “the world” on their shoulders right?