Contradictory signals on the dollar

Two reports today send conflicting signals about what’s going to happen to the dollar in the near term. In the Chicago Tribune, Bill Barnhart reports that one longstanding bear thinks Bretton Woods 2 is going to last a while:

The good news was compounded by a bullish commentary by legendary bond-market bear Bill Gross, chief investment officer of Pimco. In remarks released Wednesday, Gross, who has been well known for years for his gloomy predictions about interest rates, said a political bargain between officials of the United States and Asian nations, notably China, should keep U.S. inflation and interest rates low for several more years…. In his commentary, available at www.pimco.com, Gross said the 10-year yield could drop to 3 percent within five years. Professional bond traders are overwhelmingly bearish on interest rates, expecting the 10-year yield to climb this year toward 5 percent. But Gross argued that a political bargain between U.S. and Asian officials means “a range of 3 percent to 4.5 percent for 10-year nominal Treasuries will prevail.” Gross said U.S. and Asian nations seem to have entered a political pact, whereby Americans can consume cheap imported goods and afford houses, while Asians can protect their economies, create jobs and maintain competitive currency values. The refusal of the Bush administration on Tuesday to label China as a currency manipulator for pegging its currency to the dollar contributes to the “bargain” theory. “America’s growth has been stitched together more from the iron fist of government policies than the invisible hand of a dynamic free enterprise economy,” Gross wrote. In his January commentary, Gross had predicted that China would revalue its currency higher in 2005, a move that likely would send the U.S. dollar lower and U.S. inflation and interest rates higher. At that time, he urged investors to hold assets in cash.

On the other hand, Anna Fifield and Chris Giles report in the Financial Times that South Korea is about to roil these waters:

South Korea’s central bank will not intervene any further in foreign exchange markets, the governor of the Bank of Korea said on Wednesday in comments likely to unsettle financial markets. ?I believe that we now have sufficient reserves to secure our sovereign credibility, so I do not anticipate increasing the amount of foreign reserves further,? Park Seung told the Financial Times. South Korea’s foreign currency reserves stand at $206bn the fourth largest in the world. Mr Park said: ?We now need to take more consideration of profitability, and I think we’re at a stage where we need to manage our reserves in a more useful way.? Although he made no explicit comment on the won, Mr Park’s remarks imply that South Korea is now unwilling to undertake the intervention required to stem its currency’s rise…. With Japan, China and South Korea which together hold at least a third of the world’s central bank foreign exchange reserves each likely to suffer if one moves first to lessen their exposure to the dollar, some economists believe there is scope for more regional co-operation. Mr Park said: ?I think that the economic co-operation of these three nations and the co-operation of their central banks is necessary to promote the growth and development of the global economy.? But the banks were working together only to maintain financial stability and were not doing anything that might ?affect? international markets, he said.

Click here to see what happened the last time South Korea said anything about its dollar purchases. Developing…. UPDATE: Brad Setser links to a Financial Times follow-up by Anna Fifield on the Bank of Korea decision, in which the Bank walked back furiously from Park’s comments:

The Bank of Korea on Thursday backtracked on its comments that it did not plan to intervene further in the foreign exchange markets, after precipitating a sharp fall in the US dollar overnight. Currency traders said it appeared that the central bank in fact bought dollar-denominated assets on Thursday morning, less than 24 hours after Park Seung, the governor, told the Financial Times that he did not ?anticipate? doing so…. Mr Park?s comments pushed the won up sharply against the dollar in US trading on Wednesday, and it hit 999.5 immediately after the local market opened on Thursday but shortly fell back below the psychologically-important 1,000 mark to close at 1,005. The central bank on Thursday confirmed that Mr Park had been quoted accurately but it nevertheless released a statement saying that he had been ?misunderstood.? ?The Bank of Korea will take necessary measures whenever the currency markets are unstable. Especially, we will not sit idly by if speculative funds come in to exploit a groundless news report,? it said…. Even Han Duck-soo, finance minister, last month said that reserves of about $200bn ?may be adequate? for South Korea. But on Thursday Mr Han said Korean authorities would continue taking action when the foreign exchange market showed any instability. ?When we see speculative forces and excessive volatility, we will act together with the Bank of Korea through smoothing operations,? he told reporters on the sidelines of a conference in Seoul.

Here’s a link to the original FT interview with Park. As Setser points out:

It sure seems like the Bank of Korea (the central bank) and the Ministry of Finance (if not the entire government) are in somewhat different places. The Finance Ministry is worried about any slowdown in growth, and Korea’s export growth seems to be slowing. This policy dispute just played out in a very public way.

I concur — there’s no way, especially after the February episode, that Park didn’t know what the effect of his interview would be on the currency markets.