To defy Paulson and Bernanke today would be irresponsible

Foreign Exchange Currency Outlook : To the extent that uncertainty over the Paulson plan is driving the foreign exchange market today, we say relief is in sight. Congressmen at heart are cowards who will not dare defy the financial experts for long. We admire the Republicans who are saying the emperor has no clothes, but they are in a minority and their party does not control Congress. They may be right but being right is not what counts—what counts is that Congress take action when the experts tell us we must take action. To defy Paulson and Bernanke today would be irresponsible and the voter would turn on these guys if the sky does fall.

The voter may think he doesn’t like the plan now, but they would like the sky falling even less.

Therefore, Congress will act. When?

Probably Sunday night or Monday.

For one thing, politically it’s the right thing to do (taking the stage from McCain). For another, the Treasury is likely to find a goad to scare Congress with—maybe something having to do with Wachovia and Morgan Stanley. Third, it’s likely Bush steps in again, despite the utter failure of last night’s effort. It’s his job to step in, lame duck or not.

The real problem is that the US dollar exchange rate rises on the prospect of a plan and falls when uncertainty over the plan emerges. But what if we get a plan and it doesn’t work?

Despite this delay, we still think the dollar exchange rate is getting a boost on the prospect of the plan getting passed and will get a relief rally when it is passed—but after that, watch out. The market will then judge whether the plan is big enough and will work. It’s always possible that $700 billion is not enough—Bernanke had saidin testimony this week that it’s about 5% of total mortgages at risk—but it’s not clear that this is the sole criterion for rescue. If the plan looks insufficient or wrongly structured in any way, the dollar is toast.

The dollar exchange rate is also toast after other consequences, intended and unintended, start becoming clearer. What if foreign banks do not improve liquidity? Is the Treasury going to keep extending swap lines? Voters will start asking who is paying for it, can we trust them to repay, and why are these guys operating in dollars in the first place—let them eat cake, er, use their own currencies. At a guess, the American chapter will be over next week but other chapters in other places will get opened. This is not the end or even the beginning of the end. We can’t see how the US dollar exchange rate can come out if the storm to come at higher levels. The only thing in the US dollars favor today would be worse conditions elsewhere. Dollar bulls want a banking crisis in Europe, not a nice thing to wish for (and not a realistic wish today, with the ECB keeping things so tightly wrapped up).

So we may go into the weekend long the dollar, but don’t be fooled—it’s a temporary thing.

Bye For Now

Barbara Rockefeller - Forex Trading Reports

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