Hype on Foreign Exchange Report

It won't tell us what we don't already know about China's policies, but the greenback loses either way.
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This column originally ran on RealMoney on May 10 at 9:41 a.m. EDT. It's being reprinted as a special bonus for TheStreet.com readers.

There is a lot of hype surrounding the foreign exchange report by the Treasury department due out at 4 p.m. EDT, but it is difficult to see how the report will tell us any more than we already know, particularly with respect to China. We know, for example, that China's fixed-rate currency regime is probably preventing China's currency from gaining against the dollar. Is it manipulation? That depends upon one's definition, but it is certainly some form of artificial suppressant to China's currency, which would almost certainly gain against the dollar if it were allowed to float freely.

Today's report is therefore mostly a political device that will at most validate what we already know about China, which is that its policies are preventing the Chinese yuan from gaining against the U.S. dollar. If the report labels China a manipulator, it would force the Bush administration to formally open negotiations with China, an action that probably would generate strain between the U.S. and China and solve little.

It also would give Congress new impetus to take market-unfriendly actions against China, which would not be good news for the dollar. Either way, it seems, the dollar loses. If China is rebuked but the Treasury refrains from labeling China a manipulator, Congress might feel that it must act on its own to fix the problem and become protectionist, a negative for the dollar.

Although neither scenario would be good for the dollar, labeling China amanipulator would probably be worse, because for one it would in essence be acall by the Treasury for a weaker dollar. Second, it would open the door tonew political actions against China, and hence, protectionist policies.

Itwould be better to give a strong rebuke but refrain from labeling China amanipulator in part because the leaders in the effort to legislate actionsagainst China (Sen. Charles Schumer, for example) have recently decided to delayactions until September. Today's report is unlikely to move these playersfrom the sidelines.

Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of

The Strategic Bond Investor

. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback;

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