US Treasury Secretary Tim Geithner has been hitting the air waves and the editorial page during his trip to the APEC conference in Singapore. From Bloomberg to CNBC, Geithner has been consistent in stating that it's very important the US maintain a strong dollar. However, he is advocating the opposite for the Asia-Pacific nations.
In an editorial in the Asian WSJ with the finance ministers of Indonesia and Singapore, Geithner said. "Market-oriented exchange rates in line with economic fundamentals will be essential in assuring the resource and sectoral shifts to match and foster the new patterns of demand." Clearly, they are advocating a path of boosting private demand to stimulate domestic growth and move away from export dominated policies. How to do that? "Among other things, emerging economies must strengthen their social-safety nets through sustainable health and retirement-benefit schemes, thus reducing the need for high precautionary saving that contributes to global imbalances."
The elephant in the room is clearly China and their managed currency peg to the US dollar. Yesterday, the Chinese made a slight shift in their language about the currency in possible anticipation of this criticism. In its third-quarter monetary policy report, the People's Bank of China changed from keeping the Yuan "basically stable at a reasonable and balanced level" to "Following the principles of initiative, controllability and gradualism, with reference to international capital flows and changes in major currencies, we will improve the yuan exchange rate formation mechanism."
Or this could've been done in anticipation of President Obama's first Far East trip. Many of those business leaders that supported President Obama during his presidential campaign want him to fulfill a promise on China. Last year, Obama pledged to "insist that China stop manipulating its currency because it's not fair to American manufacturers, it's not fair to you and we are going to change it when I am president of the United States of America."
Like the recent SNL skit on Obama's accomplishments, we have not seen the White House nor US Treasury keep this pledge. However, this is a perfect time for President Obama to generate some much needed support by being tough on China. As MSNBC's Chris Mathews pointed out last night, there has been a major shift in voters attitudes toward the Democrats. In a generic Congressional ballot, Gallup shows voters have shifted from a 50%-44% favor of Democrats this July to a 48%-44% favor of Republicans in November.
We have already seen an increase in WTO suits against China as well as commentary from EU and Brazil pointing out the problems with the Chinese currency remaining weak. If President Obama and Tsy Sec. Geithner decide to pursue this currency path, the rest of the world is likely to follow with enthusiasm.
Andrew B. Busch is Global FX Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and