In an unusual move, U.S. Treasury Secretary, Timothy Geithner, is making a special trip to Saudi Arabia. Why? Authorities in Saudi Arabia have recently withdrawn $50 billion of U.S. investments to reinvest at home. The Saudis are planning a $400 billion stimulus plan at home over the next five years.
With last year's record oil prices, the Saudis racked up a huge budget surplus. Much of that surplus of $500 billion is invested in US Treasury bills.
The six nation Gulf Cooperation Council, which includes Saudi Arabia, the UAE, Kuwait, Qatar, Bahrain and Oman, together are the second largest US creditor, next to China. These six nations peg their currencies to the dollar.
Here's the rub. Both the Chinese and the Saudis are waiting for the right time to move their reserves out of the dollar. That would put downward pressure on the dollar and create uncertainty in world markets.
So it seems that Geithner wants to reassure the Saudis the dollar will remain strong; that there is nothing to worry about. But what is so upsetting here is that the U.S. Treasury Secretary should not have to say the U.S. will defend the dollar. It should be unspoken and implied.
The dollar remains the world's reserve currency. As the dollar goes, so do all investments in the U.S. currency.
Is Geithner doing the right thing by defending the dollar?
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Reader Comments (Page 1 of 1)
7-14-2009 @ 12:45PM
Ethan said...
What else are they going to do? Trash the euro?
7-14-2009 @ 1:32PM
Dan Barnett said...
The problem is that a strong dollar hurts exports and encourages imports. Equally, a strong dollar encourages US firms to farm out jobs overseas, where employees are paid in weaker currencies. So I don't accept your position that, "the U.S. will defend the dollar. It should be unspoken and implied." The issue very much ought to be up for discussion.
Of course the "Yahoos" automatically equate a "strong" dollar with a "strong" America and so having the discussion in public is probably not a good idea.
7-14-2009 @ 1:41PM
beanspants said...
Dan, by 'defending the dollar', i don't think Geitner or the author mean that it needs to be higher versus other currencies, but rather is continuing to be a going-concern.
With our debt troubles, TARP, and housing meltdown, the dollar as a reserve currency and viability as a going concern are in question.
Anyways, while I agree that a strong dollar does dip exports, I don't agree that it encourages firms to send jobs overseas. The dollar has been pretty weak vis a vis the Euro for years and is pegged to the Yuan. American corps have still been shipping jobs overseas, and that includes to European countries where the value of the currency is higher.