Daniel W. Drezner

This is what happens when financial markets do not read my blog [UPDATED]

This is what happens when financial markets do not read my blog [UPDATED]

Apparently the foreign exchange markets got taken for a ride earlier today in response to Tim Geithner’s chat at the Council on Foreign Relations.  This makes me wonder if anyone working in forex markets actually listened to the words that came out of Geithner’s mouth. 

Here’s Kathy Lien at FX360 explaining what Geithner said that caused markets to go into a tizzy: 

In a blink of an eye, the U.S. dollar has collapsed against the Euro, Japanese Yen and other major currencies. The trigger was comments from Tim Geithner who said that the U.S. is "quite open" to China’s suggestion of moving towards a Special Drawing Right (SDR) linked currency system. If the world adopts the SDR, which was created by the IMF as an international reserve asset, it would mean that countries around the world would need to hold less U.S. dollars. (emphasis added)

Except that this is not what Geithner actually said.  To be more specific, he did say "quite open," but that’s not all he said in his first response.  This is from the CFR transcript:   

[A]s I understand his proposal, it’s a proposal designed to increase the use of the IMF’s special drawing rights.  And we’re actually quite open to that suggestion.  But you should think of it as rather evolutionary, building on the current architectures, than — rather than — rather than moving us to global monetary union.

Here was my contemporaneous read of what Geithner said

Geithner is asked about China (not my question) and the IMF’s new proposals for expanded lending.  He responds by praising Zhou Xiaochuan, China’s central bank governor, but claims that he hasn’t read his proposal in detail.  Geithner makes it clear that he is quite open to expanding the IMF’s Special Drawing Rights for less developed countries.  Still, he wants it to evolve and be integrated within the current international monetary system — as opposed to the de novo creation of a new global currency. 

I’ve read the report (Tim, it’s not that long, take a look!) and Zhou is not proposing anything so radical so soon, so this is a bit of a red herring.  Still, Geithner’s statement here carries the same kind of firm pushback that Obama gave yesterday about any move ending the dollar as the global reserve currency. 

SDRs are intended for least developed countries, so expanding that program would not profoundly affect the distribution of currency reserves among the world’s principal players.

And yet, after Geithner reaffirms this point later in the talk, Lien interprets it as follows:

A few minutes after saying the U.S. is open to an SDR linked currency, Geithner clarified his comments by saying that there is "no change in dollar as world’s reserve currency and likely to remain so for long time." In our alert, we said that the dollar would rebound if he attempts to clarify his comments. These contradictory statements are clearly the act of an amateur Treasury Secretary that has been thrust onto the public forum and is struggling with the need to be very particular in his choice of words.

Okaaaaaay….. except there was no contradiction between his statements, and anyone who’s been following this stuff for the past week should have understood Geithner’s point the first time.

Question to readers:  shouldn’t the forex markets have interpreted these statements better than your humble blogger?  What does this say about the wisdom of crowds? 

UPDATE:  The Financial Times’ Krishna Guha, Tom Braithwaite and Peter Garnham provide more precise reporting on this point: 

The dollar fell 1.3 per cent against the euro as headlines saying “Geithner open to SDR currency” flashed across traders’ screens. With the currency falling, Mr Geithner’s interviewer – Roger Altman, a deputy Treasury secretary in the Clinton administration – gave Mr Geithner the chance to clarify.

The Treasury secretary said: “I think the dollar remains the world’s dominant reserve currency.” The dollar subsequently recovered much of its losses.

One fuzzy headline, and you get majoy gyrations in the forex markets. 

James Carville once said, "I want to come back as the bond market. You can intimidate everybody."  I want to be reincarnated as a headline editor.