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Mix-Ansicht- Paulson's appointment is suddenly starts being cited as dollar supportive influe - Emerald, 31.05.2006, 20:14
Paulson's appointment is suddenly starts being cited as dollar supportive influe
-->Why Paulson's Nomination as Treasury Secretary Deserves a Little More Respect
Ray Attrill Tel +612 8211 0493 r.attrill@4castweb.com
* The nomination of Hank Paulson as new US Treasury Secretary is interesting on several fronts, even if in practice it means only that the dollar does not fall as far or as fast it might otherwise.
The nomination of Goldman Sachs CEO Hank Paulson to succeed John Snow as Treasury Secretary came as surprise on two fronts. Firstly, given seemingly well informed media reports in recent days suggesting former Commerce Secretary Don Evans was to get the job; and second, given reports that senior Wall Street figures had been sounded out for the job. But no-one was interested in a role that was perceived to be that of a White House puppet whose strings would be pulled by Karl Rove. The appointment of Paulson is interesting on several fronts, though whether it will make a substantial difference to policy, and policy rhetoric, is a very open question that open time can answer.
1. The appointment of Paulson, if confirmed, could mark an major step in restoring status to the Treasury Secretary position, and hence the Treasury as an institution, last seen under Messrs. Rubin and Summers at the end of the Clinton era. Though Treasury undersecretary Tim Adams has been credited with going someway to restoring morale within the Treasury and helping to steer the organization back in the direction of a genuine policy making body, there was no doubt that while Snow was at the helm the primary purpose of Treasury was to speak up for White house policy under the direction of Bush's chief political advisor Karl Rove. It is hard to imagine that the CEO of Wall Street's preeminent investment bank would have agreed to accept the Treasury Secretary role under these circumstances, notwithstanding Paulson's staunch Republican affiliations.
2. As was noted to great effect by UK Times commentator Gerald Baker on Tuesday, the dollar has tended to fare better under Treasury Secretaries drawn from Wall Street than either Main Street or political circles. This was rationalized on the basis that the public commitment to a strong dollar policy could be regarded as genuine under the likes of Wall Street figures, regarding stability/strength in the currency as contributing to financial stability - and the standing of the US in the global financial marketplace, in contrast to industrial or political figures who sees a more competitive dollar as serving their direct interest or their political constituency.
3. Someone of the stature of Paulson surely is liable to better articulate and argue the case against protectionism in Washington. On the China issue in particular, Paulson's extensive visits and contact with high-ranking Chinese official (including hosting a visit by Mr. Hu to Ground Zero in 2002) stand him in good stead to deepen friendly relations with the US. By the same token, it may be that Paulson is less willing to beat the Yuan revaluation drum as frequently and loudly as his predecessors, either because he sees it is less essential, or liable to be counterproductive (as arguably has been the case under Snow). Of course, if Paulson tones down the currency rhetoric, then perhaps he will then start to see more, not less movement on the Yuan down the track. To the extent that we see less not more confrontation with China under Paulson, this also helps to reduce the risk of China threatening to reduce its sponsorship of the US bond market in retaliation for actions against it on the trade front. If at the same time Paulson's appointment helps persuaded the market that there if there was, there is no longer, an unspoken policy of encouraging a weaker dollar, then we should regard his appointment as marginally bond market and dollar supportive. Yet in both cases this quite conceivably means that 'yield will not rise as much, and the dollar not fall as fast' as it might have done under say Don Evans.
4. While Paulson is likely to be a staunch supporter of the Bush administration's policy of deep tax cuts - and their longevity - he may make the case for deeper cuts in spending than O'Neill or Snow if after, not before, the November elections and also potentially bond friendly
All this said, we should not lose sight of the fact that the reason why Snow's tenure has been drawn to an unseemly close after a lengthy whispering campaign against him, is because the White House wanted someone at Treasury who could better articulate the nation's economic success and the government's role in achieving it. As such we should not expect any abrupt about turn in the rhetoric coming out of the mouth of the new Treasury Secretary. Similarly any restoration credibility to the Treasury as an institution is not likely to come overnight, even if Paulson's appointment does prove to represent a turning point.
The FX market's lack of reaction so far to Paulson's appointment looked like classic case of ignoring positive news because the market mood was to sell dollars. We would not be surprised if, following say a couple of good economic numbers and increased conviction in favor of a June Fed tightening, that Paulson's appointment is suddenly starts being cited as dollar supportive influence.
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