A report that the U.S. Treasury Secretary is "open" to rethinking the U.S.-dollar-based global reserve currency system sent the U.S. dollar into a tailspin on Wednesday, but the moves were wiped out when the comment was revealed to be out of context.
Traders were frustrated by Timothy Geithner's ambiguity and inability to deliver a clear message while speaking at the Council of Foreign Relations in New York. The U.S. dollar fell by more than a cent against the euro and pound sterling when the comment was initially reported, but quickly pared most of its losses.
Geithner was asked to respond to Zhou Xiaochuan, the governor of the People's Bank of China, who wrote an essay last week suggesting a shift to a basket of major currencies instead of the U.S. dollar. Zhou said it might make sense to use the IMF's special drawing rights (SDR), which include the dollar, euro, pound sterling and yen.
Markets are sensitive to comments from China because it's the largest holder of U.S. Treasuries. Investors are also worried that growing U.S. deficits and quantitative easing will undermine the U.S. dollar.
Geithner said he hadn't read the proposal but that any suggestion from Zhou "deserves consideration".
"As I understand his proposal, it's a proposal designed to increase the use of the IMF's special drawing rights. And we're actually quite open to that suggestion," he said.
The comment was somewhat ambiguous because it could be interpreted as Geithner saying he is in favour of reforming the currency reserve system, but he was more likely saying expanding the SDR was up for discussion.
Reuters released a headline that leaned toward the former, which read: "Geithner says 'quite open' to China's suggestion of moving toward SDR-linked currency system."
The comment from Geithner would have flown directly in the face of U.S. President Barack Obama who rejected China's call in a televised address on Tuesday. He defended the dollar, calling it "extraordinarily strong" and said he doesn't believe there is a need for a global currency.
Traders blamed Geithner for making a comment that could be easily misinterpreted.
"It was clumsy and mishandled," said David Watt, senior currency strategist at RBC Capital Markets. "The initial interpretation was not necessarily correct but on the other hand, Geithner's comment was wholly poorly advised ... He should be able to see a minefield and avoid it."
Geithner has been praised for his work behind the scenes but has struggled while in the limelight. Watt said the Treasury Secretary, who is responsible for the dollar, should never have admitted to not reading a widely-discussed essay.
"You look incompetent. He's got a few issues now where the market is wondering what he's thinking," Watt said.
Geithner was later asked to clarify earlier remarks.
"I think the dollar remains the world's dominant reserve currency," Geithner said. "As a country, we will do what's necessary to make sure we're sustaining confidence in our financial markets."
The clarification led currency market participants to cover U.S. dollar shorts but it remains lower against the euro.
Watt said the market is unconvinced that the U.S. dollar will remain the dominant reserve currency.
"It's not something that's going to happen right away, it will take months or years but it would be significant," he said.
Most recently, the Canadian dollar was up 0.0041 to 0.8157 against the U.S. dollar (1.2256 USD/CAD) and up 0.32 to 79.76 against the yen.
The U.S. dollar was down 0.10 to 97.76 against the yen and the Dollar Index was down 0.053 to 83.805.
The euro was up 0.0085 to 1.3553 against the U.S. dollar, up 0.0018 to 1.6611 against the Canadian dollar, up 0.0123 to 0.9295 against the pound sterling and was higher by 0.68 to 132.49 against the yen.
The pound sterling was down 0.0100 to 1.4581 against the U.S. dollar and down 0.0218 to 1.7869 against the Canadian dollar.
All data taken at 12:29 p.m. EDT.
By Adam Button and edited by Stephen Huebl
©CEP News Ltd. 2009