Snow flubs commentary on dollar

www.nashvillecitypaper.com Commentary by David DeRosa

It didn’t take long for U.S. Secretary of the Treasury John Snow to get in trouble talking about the dollar.

When asked about the dollar’s decline following a hearing before the House Ways and Means Committee, Snow, who has been in his post since February, quipped that he was “not particularly concerned about that.”

So, of course, the currency market declared open season on the dollar, sending it down about one full cent against the euro. Oh, the power of the Treasury secretary’s mouth.

It could have been worse had Snow’s aides not stepped up to declare that there had been no change in Treasury’s strong dollar policy, one that Snow himself supported during his Senate confirmation hearing. That put the breaks on the dollar’s slide, at least for now. The dollar has fallen more than 20 percent against the euro over the past 12 months.

A Railroad man

So, no big deal, you might say. Maybe, except it will probably happen again. The reason is simple: Snow doesn’t know how the market works.

His career was not spent in a trading environment; he was a railroad man. Casey Jones isn’t watching the market’s semaphore. When the Treasury secretary speaks, there can be trouble ahead and trouble behind for the dollar.

The ways of the market mystified Snow’s predecessor, Paul O’Neill, too. He was a paper and aluminum executive. At one point he threw up his hands and declared in so many words: “Why would anyone care what I say?”

Here’s why.

Foreign exchange traders have positions in currencies, long or short the dollar against other currencies. Some of these positions come as a result of making markets in foreign exchange. Others are deliberate bets on the future direction of currencies.

Even a small change in exchange rates can generate sudden, steep trading losses, or profits for that matter.

The foreign exchange market is huge. It trades something on the order of $1.3 trillion a day.

But even a small position, say dollars against the euro in the amount of 1 million euros can get hurt. If the euro moved from 1.0900 to 1.1000 — which is approximately what Snow’s comment caused — there would be a loss of $10,000.

That doesn’t sound like much except that the actual positions in the foreign exchange market are humongous. If that had been dollars against 100 million euros, the loss would be $1 million — all over the course of about one or two minutes.

For most foreign exchange traders, the art of the game is in avoiding getting clipped on short-term moves like what happened yesterday. The point is that the market is like a coiled spring waiting to release.

Good news

Snow did better a day later when he spoke about the energy market. He addressed short- and long-run supply and demand much as you might hear in a course on microeconomics.

He said that high gas prices reflect “the uncertainty about the geopolitical situation. Once we put that behind us, gas prices will return to normal.”

Snow singled out the Middle East situation and Venezuela for driving up oil prices, and said more supply is on the way because “new wells are being brought on stream in Texas and Oklahoma and other places like that.”

On the demand-side, he said “the higher oil prices are going to lead to considerable conservation,” adding that “they already have.”

“With the higher oil prices, people are driving their smaller cars rather than their SUVs. They’re buying smaller cars and cutting back on demand for the SUVs,” Snow said.

There is nothing wrong with that analysis. The energy market is probably going to play out the way he suggests, given enough time. What is revealing is that Snow is a big picture kind of guy — who may be a tad light on the close-up view on how money and foreign exchange markets functions.

David DeRosa, president of DeRosa Research & Trading, is also an adjunct finance professor at Yale School of Management.