The political world has awakened to the reality that currencies matter and aid with stimulating exports. This is why something must be done to halt the weakness of the US dollar. With predictions of further declines by such illustrious names as Warren Buffet and Mohamed El-Erian, countries are increasingly verbalizing their angst and warning that they will act.
Although US Treasury Secretary Geithner and White House economic adviser Larry Summers have both said that the strong US dollar policy is unchanged, Summers has said recently that the US must shift from being a consumer led economy to an export led economy. In July, Summers gave a speech at the Peterson Institute and said, "The rebuilt American economy must be more export-oriented and less consumption-oriented, more environmentally oriented and less fossil-energy-oriented, more bio- and software-engineering-oriented and less financial-engineering-oriented, more middle-class-oriented and less oriented to income growth that disproportionately favors a very small share of the population." While this isn't explicit, the implicit call is for a weaker US dollar to be tolerated to stimulate new exports.
For several weeks, the Canadian government has warned about their strong currency and indicated they may act to do something about it. The latest is Bank of Canada Deputy Governor Timothy Lane saying, "A second important risk (for the Canadian economy) is the possibility of persistent strength in the Canadian dollar, which would work against the positive factors that I mentioned earlier....If a stronger dollar were to alter the path of projected inflation relative to that presented in our July Monetary Policy Report, we would need to take that into account. As we have said before, even though we are at the effective lower bound for our policy rate, we retain considerable flexibility through the use of unconventional monetary policy instruments, including quantitative easing." That's a big bomb to let off just to stem the rise in the currency.
Yesterday, France's Prime Minister Sarkozy stated that the Euro cannot be alone in bearing the weight of foreign exchange adjustments. He said that we must avoid excessive and destabilizing currency fluctuations. This ignited a US dollar rally as it indicated that Europe realizes their exports will suffer as the US dollar weakens and the Chinese yuan remains effectively pegged to the US dollar. When the head of a European government discusses a currency, this tells you the importance. Also today, we had the head of the Swiss National Bank warn about the Swiss franc being too strong against the Euro. Thus, the currency fighting includes neighbors as well.
The next G20 meeting will occur in Pittsburgh on September 24th-25th. As the US dollar has reached near the lows of the year, the lead up to the meeting should ignite a currency verbal food fight as nations jockey for export growth. The fight will generate concerns over a possible trade skirmish and could undermine the outlook for equities heading in the dangerous September/October period. If the equity markets soften, then we'll see a US dollar rally that will the delight non-US exporters.