Timothy Geithner is due to present the plan to relieve US banks from toxic assets. While this is intended to be a Public-Private plan, funding this scheme may, yet again, result in printing US dollars – sending the greenback down. It already happens now, before the announcement.
US Secretary of Treasury, Timothy Geithner, is due to deliver a speech today at 12:45 GMT, in which he’ll present the new plan to relieve American banks of their toxic assets. The motivation of this plan is to insert fresh, non-toxic capital into the banks, in order to encourage them to lend. More lending means more stimulus for the economy. The plan is currently planned to be in a size of $500 billion, but might rise to $1 trillion.
The problem with this plan, is that it involves more public spending – more dollar printing. The plan aims to spend $75 to $100 billion from the already approved stimulus package. The rest will come from the private sector. Sounds OK, right? No extra spending – no news.
But there’s an expected dependency on the private sector, a promise that might not be fulfilled. According to Reuters (emphasis mine)
Under the program Geithner has crafted, the government will provide the lion’s share of the funding to buy up soured assets to encourage private investors to participate.
So, more public money may be spent here. More dollars could be printed. While this could be good for the economy, it isn’t good for the US dollar.
The leakage of the toxic asset plan already has an impact on forex trading. The dollar weakened against most currencies. EUR/USD now trades at 1.3680. It started the forex week with a weekend gap, and already tested the 1.3730 which was last week’s high.
Also the British Pound, Swiss Franc made gains against the dollar. Stronger gains were made by the Aussie and the Kiwi.
Only the Japanese Yen is suffering. The Japanese Yen was hit by the bad BSI Manufacturing Index that plunged to -66, much worse than early expectations of -47.
I’ll be following the official announcement of the Toxic Asset plan by Geithner. It’ll be interesting to see if the greenback will take one step lower today, on this Toxic Dollar Plan.
For a general review of the rest of the week, check out the Forex Weekly Outlook.
Update 1: Timothy Geithner said that in order to get out of the crisis, the risks need to be taken.
Update 2: PIMCO already said they would participate in the Toxic Assets plan, and called it a win-win deal.
Update 3: Existing Home Sales were better than expected. Is American Housing above the bottom?
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