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United States News Title: Dollar plunges on Paulson appointment Dollar plunges on Paulson appointment By Steve Johnson Published: May 30 2006 11:46 | Last updated: May 30 2006 19:22 The US dollar fell sharply on Tuesday as Hank Paulson, Goldman Sachs’ chief executive, was named as the new US Treasury secretary, replacing the increasingly pressurised John Snow. Mr Paulson has extensive links with China and some saw him as potentially better equipped than his predecessor to encourage Beijing, and the wider emerging Asian bloc, to allow a faster appreciation of the renminbi in order to help reduce global economic imbalances. Beijing has allowed the renminbi to crawl just 1 per cent higher against the dollar since last July’s 2.1 per cent revaluation, with the currency falling to a nine-week low of Rmb8.032 on Tuesday. The importance of this issue was made clear by George W. Bush, US president, who said one of Mr Paulson’s objectives would be to ensure the currency flexibility of the US’s trading partners. “China has not taken kindly to pounding the pulpit and speakers who seem to convey an antagonistic approach,” said Michael Woolfolk, senior currency strategist at Bank of New York. “Mr Paulson has considerable experience in China and is well regarded over there. He could reinvigorate the discussions over currency policy.” He added: “Paulson represents a window of opportunity to accomplish a soft landing to a rapidly growing global imbalances problem. If anyone is capable of carrying this off, he is one of the best placed. The ‘strong dollar’ policy may quite quickly have an epitaph written for it: ‘rest in peace’.” Monica Fan, global head of FX strategy at RBC Capital Markets, also saw Mr Paulson’s Chinese links as crucial. “Paulson’s intimate knowledge of the Chinese administration and pro-environmental stance means he is more popular in China. He may be more effective in persuading China to allow greater currency appreciation,” she said. However, Ms Fan argued this could allow the dollar to strengthen against the euro, with European currencies no longer having to bear as much of the burden of dollar adjustment. Tony Norfield, global head of FX strategy at ABN Amro, argued that Mr Paulson would not be as bad for the dollar as several other candidates for the Treasury job would have been, notably Don Evans, who was seen as reacting to the concerns of industry, and Martin Feldstein, who had said the dollar needed to fall by 30-40 per cent to help rein in global imbalances. Indeed, the dollar had fallen in morning trading on speculation that Mr Evans was to be appointed, before initially firming on the news that Mr Paulson had been named, only to hit new lows later on. By mid-session New York trade, the dollar was down 1 per cent at $1.2866 to the euro, 1.3 per cent to $1.8818 against sterling, 1 per cent to SFr1.2119 against the Swiss franc, 0.2 per cent at Y112.23 against the yen, and 0.6 per cent to C$1.0995 against its Canadian counterpart, brushing 28-year lows. Some attributed part of the dollar’s sell-off to a slide in US consumer confidence in May, although the reading still came in ahead of market expectations. The dollar did gain 2.3 per cent to R$2.3245 against the Brazilian real and 0.8 per cent to 11.274 pesos against the Mexican peso as a selective withdrawal from emerging markets continued. Sterling was strong, rising 0.3 per cent to £0.6835 to the euro, 0.8 per cent to $A2.4704 against the Australian dollar and 1 per cent to Y211.08 against the yen, amid a view that housing data due on Wednesday might prove strong enough to tilt the Bank of England towards a near-term rate rise. The yen fell 0.7 per cent to Y144.34 to the euro as Toshihiko Fukui, the governor of the Bank of Japan, reiterated his view that the end of quantitative easing would not automatically spell the end for Tokyo’s zero interest rate policy.
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