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Snow Falling on Greenbacks

Rumors of a switch at Treasury hurt the dollar while rising bond yields weigh on stocks.
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The dollar came under pressure Thursday after a report suggested the next move from the ailing Bush administration would be to dismiss Treasury Secretary John Snow.

Joshua Bolten, Bush's new chief of staff, wants to replace Snow with someone who can "more forcefully" convey the administration's message that the economy is strong, the

New York Times

reported, quoting an anonymous source described as a "prominent Republican."

Snow has been criticized for being a "cheerleader for the dollar," even in 2004 when the administration wanted the currency to weaken, according to Ashraf Laidi, currency strategist at MG Financial.

A new Treasury secretary might be more inclined to boost the economy via a weaker dollar, which would cheapen U.S. exports and help relieve the soaring trade deficit, Laidi says. In addition, Snow's replacement might be more aggressive in adding pressure on China to let its currency, the yuan, appreciate vs. the dollar from artificially low levels. Similarly, Japan might be "encouraged" to raise interest rates faster, a move that would boost the yen vs. the dollar.

Administration officials and Snow himself declined to comment on the report, according to



The dollar nonetheless dropped 0.8% vs. the euro and 0.3% vs. the yen on Thursday. The greenback's swoon also helped propel commodities, most of which are dollar-denominated. Gold and oil, which tend to move on geopolitics jitters, also received a bid after news that Iran refused to back down on plans to develop nuclear energy.

Gold surged $13.20, or 2.3%, to $592.10 an ounce, a 25-year high. Crude oil rose 70 cents to $67.15 a barrel, a two-month high.

The dollar's weakness also weighed on Treasuries, which were already under pressure after revisions to the fourth-quarter GDP revealed a stronger-than-expected inflation picture. The price of the benchmark 10-year Treasury bond fell sharply while its yield, which moves inversely, rose to 4.86%, a 22-month high.

Rising Treasury yields, in turn, pressured stocks. The

Dow Jones Industrial Average

dropped 65 points, or 0.6%, to 11,150. The

S&P 500 index

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fell 0.2% to 1300.


Nasdaq Composite

, however, rose 0.13% to 2340. The tech-heavy index, which pushed above a five-year high on Wednesday, was supported by the likes of


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, however, dropped 1.7% after saying it plans to sell 5.3 million new shares.

Dollar Dilemma

Uncertainty will likely continue to pressure the dollar until the situation at the Treasury is clarified, says Laidi. But the strategist believes the administration might make an announcement as early as next week. The White House needs to have somebody at the helm of the Treasury before the visit of Chinese President Hu Jintao in April, he says.

The dollar, which has remained supported by rising U.S. interest rate hikes in 2005, briefly spiked on Tuesday as the

Federal Reserve

delivered its 15th rate hike in a row.

Part of the Fed's logic for raising interest rates since June 2004 was to stabilize the dollar, which had dropped sharply as the Fed cut rates all the way to a 40-year low of 1% in 2003. A weak dollar boosts domestic production but it can also boost inflation as imports, especially of energy and of other commodities, cost more.

As the Fed relentlessly raised rates, the dollar remained strong throughout 2005. But since November, the market began suspecting that the Fed's rate hikes might come to an end in the first half of 2006, and the dollar has dropped. The dollar index, which measures the dollar vs. a basket of the world's main currencies, is down 3% since November.

"It appears that we've seen the highs for the dollar this year," says Ron Simpson, global currency strategist at Action Economics. This, he says, holds particularly true vs. the euro, as the European Central Bank is sounding increasingly hawkish amid signs of growth in eurozone countries.

Against the yen, the greenback will likely hold its ground, as the Bank of Japan is not expected to raise interest rates until the end of the year, Simpson says.

That means the yen "carry trade" -- the borrowing of yen to invest in higher yielding currencies -- is likely to continue, he says. The carry trade has fueled speculation in everything from emerging-market bonds to U.S. Treasuries and commodities.

Presuming the dollar weakens and commodity strength continues, market participants would be wise to remember the Fed has

added commodities ( to the list of factors it is closely monitoring as potential sources of inflation.

In the face of an administration -- and potentially a new Treasury secretary --- who may want a weaker dollar, new Fed Chairman Ben Bernanke might have a ways to go to establish his inflation-fighting credentials.

In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;

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