Posted by Joseph Y. Calhoun, III

If the headline seems a bit contradictory you obviously haven’t attended the US School of Treasury Secretary Diplomacy. Geithner claims to want a strong dollar:

TOKYO — U.S. Treasury Secretary Timothy Geithner said Wednesday that maintaining a strong dollar is “very important” for the country’s economy, sticking to his mantra on foreign-exchange policy as the U.S. currency continues its broad downtrend.

“I believe deeply that it’s very important for the U.S. and the economic health of the U.S. that we maintain a strong dollar,” he said at a roundtable discussion with Japanese reporters. “We bear special responsibility for trying to make sure that we are implementing policy in the U.S. that will sustain confidence not just among American investors and .. savers but investors around the world” that the U.S. will fix its budgetary problems as its economy improves.

It would be easier to maintain a strong dollar if we had one but since we don’t, lip service will have to do. The same is true of “implementing policy in the US that will sustain confidence”. It is hard to sustain something that we don’t have and that policy doesn’t engender. It is also interesting that the reporter, Takashi Nakamichi, takes this statement as an endorsement not of a strong dollar but rather continued devaluation thereof:

Lack of major changes in his tone indicates that, while he doesn’t want any dollar freefall to shake the recovery in the U.S. economy, he may find it comfortable as long as the currency declines at a manageable pace. A weaker dollar could boost U.S. exports by making them less expensive abroad, lifting the nation’s growth and cutting its trade deficit.

In other words, no one takes Geithner’s support for a strong dollar seriously. Geithner also spoke about China’s currency:

“I don’t want to say more than what I’ve said in the past, which is that China has laid out this very broad direction of reforms’ to invigorate domestic demand, Mr. Geithner said. “It’s a very complicated mix of policy changes. As part of that, they’ve recognized that it’s in their interest over time to move to a move flexible .. exchange rate.”

So, while Geithner supports a strong dollar, he also supports a more flexible exchange rate for China which is code for a stronger Yuan. It must be tiring to talk out of both sides of your mouth all the time.

China appears ready to oblige by allowing the Yuan to start rising again:

BEIJING (Reuters) - China sent its clearest signal yet that it was ready to allow yuan appreciation after an 18-month hiatus, saying on Wednesday it would consider major currencies, not just the dollar, in guiding the exchange rate.

In its third-quarter monetary policy report, the People’s Bank of China departed from well-worn language on keeping the yuan “basically stable at a reasonable and balanced level.” It hinted instead at a shift from an effective dollar peg that has been in place since the middle of last year.

“Following the principles of initiative, controllability and gradualism, with reference to international capital flows and changes in major currencies, we will improve the yuan exchange rate formation mechanism,” the central bank said in a 46-page monetary policy report.

Do the Chinese laugh at us behind our backs? We encourage them to let their currency appreciate which will allow them to buy US goods and assets cheaply and they grudgingly oblige. “Ooookay, we don’t really want to buy all your stuff on the cheap, but if you insist…..” We’re begging them to buy our seed corn. Amazing that this is what passes for economic policy in Washington DC.