Jawboning delivers dollar gains

LONDON (MarketWatch) - U.S. Treasury Secretary Timothy Geithner appears to have won a respite for the U.S. dollar, economists said Monday, after various officials voiced confidence in the greenback following the weekend meeting of the Group of Eight finance ministers in Italy.

The most dramatic signal of support for the dollar came from Russian Finance Minister Alexei Kudrin on the sidelines of the G8 gathering in Lecce. Kudrin said the dollar's role as the world's main reserve currency wasn't likely to change any time soon.

"It is hard to say that in the next few years this system will change significantly," Kudrin said, according to news reports.

That marked a change of emphasis for Kudrin and other Russian officials. Russian and Chinese officials have this year repeatedly called for changes in the global financial system that would downgrade the dollar's role as the world's primary reserve currency.

Officials have said they fear massive U.S. borrowing will erode the value of the greenback and the value of their reserves. China is the largest holder of dollar reserves. Japan is second and Russia is third.

Meanwhile, International Monetary Fund Managing Director Dominique Strauss-Kahn told reporters that the dollar was "correctly valued" by the markets and likely wouldn't be pressed lower in the near term.

And just ahead of the G8 meeting, Japanese Finance Minister Kaoru Yosano told Bloomberg that the government's trust in U.S. Treasuries was "absolutely unshakeable."

On Sunday an aide to Russian President Dmitry Medvedev told reporters in Moscow that the meeting of leaders of Brazil, Russia, India and China -- the BRIC nations -- won't discuss alternative reserve currencies at their summit meeting in Yekaterinburg, Russia, on Tuesday, news reports said.

The dollar rose versus most major currencies Monday and remained 1% higher versus the euro, with the shared currency exchanging hands at $1.3881. See Currencies.

"It's a little bit interesting" that officials made a range of dollar-friendly comments after meeting with Geithner and other U.S. officials, said Daragh Maher, currency strategist at Calyon.

"There seems to be a concerted effort not to dollar bash," he said.

Simon Derrick, chief currency strategist at Bank of New York Mellon, said the weekend developments were among "growing signs of an indirect campaign of verbal intervention to support the U.S. dollar."

Derrick, in a research note, said the apparent campaign has been having an impact ever since Geithner's trip to Beijing earlier this month.

Chinese officials subsequently changed their emphasis, downplaying talk of downgrading the dollar's role as an international reserve.

Kudrin's remarks "seem to indicate that he has also been persuaded that there is little to be gained from talking down the value of the U.S. dollar given Russia's existing exposure," Derrick said.

But economists questioned how much mileage dollar bulls can get from the comments.

After all, remarks underlining the dollar's medium-term role as the world's premier reserve currency don't necessarily contradict a long-term desire to reduce exposure to the greenback, Maher said.

But the pace of the dollar's recent decline may have spooked big holders of dollar reserves, prompting the change in emphasis, he said.

Meanwhile, with signs that growth of foreign currency reserves are again growing at a fast pace "it seems that the issue of reserve diversification will not go away that easily," Derrick said. "In other words, while officials may feel that it is appropriate to provide verbal support for the greenback, it will ultimately be their actions that matter."

By William L. Watts, MarketWatch