As the dollar trades near an all time low against the euro, the question is whether Fed Chairman Ben Bernanke and Treasury Secretary Hank Paulson can talk tough enough to pump up the sagging greenback.
Bernanke and Paulson speak before the Senate Banking Committee this morning in a hearing that could stretch into the afternoon. Bernanke's testimony is initially his long scheduled semi annual testimony on the economy. Paulson was to join him and the focus turns to the Treasury and Fed plans to backstop Fannie Mae and Freddie Mac and no doubt the health of the financial system.
Bernanke's prepared remarks were released ahead of his appearance. He said the Fed is concerned about economic growth and the risks of inflation have intensified. His comments knocked more wind out of the stock market and weighed on the dollar. Paulson speaks later and they both take questions.
"If they say the same thing they always say, it's going to be ugly for the dollar. If they stick with the strong dollar mantra, the dollar's going to take another swoon," said Brian Dolan, chief strategist at Forex.com.
The dollar initially strengthened on Sunday's news of the Treasury plan, but as markets around the world start to reflect skittishness among foreign investors, the dollar has slid. Overnight, the euro shot above $160.39, a new high.
"These guys are all in a position to console and stabilize the market. I expect a little bit of cheerleading," said Dolan. But he said what the markets really want to hear is that U.S. officials are willing to use more than just words to defend the currency, and that they are ready to take action. Paulson and Bernanke also need to tell markets that fears around the financial sector are over blown and that the dollar should not be trading lower.
"All they need to do is change a little bit of the language and the market will maybe see a change in the risk calculus," he said.
"Since the whole credit crisis began, this is the most heightened chance of intervention we've had," said Dolan. Bernanke and Paulson will attempt to get support for the plans to backstop Freddie and Fannie, which needs Congressional approval.
But their words are aimed just as much at the international arena. "They are talking very much to an international audience. They're also getting pressure from various foreign governments to prevent the dollar from falling further," Dolan said. He also said they will want to stop the "runaway train" of a falling dollar, which is contributing to rising oil and other commodities prices.
Boris Schlossberg, senior currency strategist at DailyFx.com, told us in a note yesterday that the fading dollar gave way to the euro as the safe haven trade in the currency markets once more. "Since the greenback can't seem to get out of its own way, battered by systemic risk and anemic growth, the only way to strengthen it appears to be through intervention," Schlossberg wrote. (note to readers: includes fix to Schlossberg's title)
But he also notes that intervention doesn't always work and it has to be a major effort by the G-3 rather than by one Central Bank. He said the Plaza accord worked in the 1980s because central banks coordinated to drive the dollar down. "I t think it is much easier to knock down a strong currency rather than prop up a weak one. It becomes a matter of psychology. Once the public doesn't like the product, you can't sell it at any price," Schlossberg writes.
"If EURUSD passes beyond 1.65, watch the intervention chatter really pick up. Having run out of policy choices this may be the only card left for U.S. authorities to play," he says. Questions? Comments? firstname.lastname@example.org