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Credibility Is Everything

Economists have debated the causes of exchange rate fluctuations for centuries. One thing that the whole Asian crisis affirms is that the most powerful influence over the value of a currency is the credibility of its government.

Mr. Suharto

of

Indonesia

last night gave the world a shock when he advanced the candidacy of Mr. Habibie, the minister of science and technology, as his choice for vice president. The market was stunned at Habibie's being chosen because he seems to stand for everything that the

IMF

is against, namely big projects and lots of spending. This defiant move caused the Indonesian rupiah to tailspin from 10,300 to 12,000 to the dollar.

Credibility is once again in question. We have to wonder just how firm of a deal

Camdessus

of the IMF did manage to get from the Indonesians. To make matters worse, international pundits are today chattering about Indonesia's having to declare some form of debt cancellation. As I said yesterday, it doesn't look good for Indonesia. Keep watching the rupiah.

* * *

Want another example of how a currency can be affected by confidence in the government? You don't have to go to Indonesia. Look right here in our own capital. A little sensational dose of sex, lies and audio tape and down goes the buck and down goes the

S&P 500

. Wonder where this leads? Nasty stuff. Whether this is a giant fakeout or the real thing, the bombshell is that it was

Mr. Starr

who arranged for the wiretap-like recording of the accusing conversation. This is shaping up either to be the end of the independent prosecutor or the end of Mr. Clinton.

* * *

Japan

right now has put its credibility on the line -- and I think it is taking a bigger risk than it might know. The prime minister,

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Mr. Hashimoto

, and his colleagues in the

Ministry of Finance

and

Bank of Japan

, have gone far out on a limb by promising the market a wide-reaching and effective economic stimulus package. This is the No. 1 factor that accounts for the recent rally in the Japanese market. The problem comes down to the old currency trader's saw "Japan never fails to disappoint." If the yet-to-be formally defined package disappoints, the judgment of the market on Hashimoto will be savage. The

Nikkei

will fall like a ton of bricks. And that goes double for dollar/yen.

By far the biggest credibility risk out there is the IMF. And if there is any doubt that

Robert Rubin

is on board, just take a look at what he said today at

Georgetown

. The Secretary is four square behind the IMF.

The good man went on to say that the IMF funding never cost the American taxpayer one dime. That is because he says we get interest on our money and because we mostly give out guarantees.

Oh boy, he knows better than that, I am sure. Somehow I don't think the former co-head of

Goldman Sachs

thinks that a guarantee is costless to grant. If that is wrong, then I would like to apply for a "free" U.S. government guarantee for my personal balance sheet. Might come in handy if I ever decide to go back into the hedge fund business.

David DeRosa heads a trading research firm and is an adjunct professor at the Yale School of Management. His column on international finance and trading appears Mondays, Wednesdays and Fridays. He welcomes your feedback at

derosa@derosa-research.com.