Thread: Plame charges could sink dollar, bonds, stocks

Plame charges could sink dollar, bonds, stocks

10/27/05 08:54 pm

CHICAGO (AFX) - The U.S. dollar, Treasurys and American stocks could sell off if top White House aides are indicted on charges they leaked the identity of a CIA employee, analysts said Thursday.

Speculation has mounted that formal charges could be announced Friday by special counsel Patrick Fitzgerald, the final day of a grand jury session.

Karl Rove and I. Lewis "Scooter" Libby are the prime targets of Fitzgerald's investigation, press reports have said. Rove, a long-time political adviser to Bush, is deputy White House chief of staff. Libby is chief of staff for Vice President Dick Cheney.

Any charges could create "political paralysis" at the White House, said Brian Dolan, head of currency research at New Jersey-based trading firm Gain Capital.
Charges would be "detrimental to the dollar, a psychological blow," said Alex

Beuzelin, senior market analyst with Ruesch International in Washington. They would distract Bush from important economic issues like high energy prices, patches of slower growth and deficit reduction, he said.

The dollar's year-to-date run may be in jeopardy should confidence in Bush's ability to steer the economy be shaken.

A weaker dollar, because it cuts U.S. purchasing power, could raise inflation risks at a time that the Federal Reserve is working furiously to stamp out its spread from high energy prices.

U.S. bond yields could rise further if foreigners become less willing to hold so much U.S. debt, raising borrowing costs. Stocks, too, might suffer, but the damage would likely be less than in the "emotional" currency market that tends to be more politically sensitive, said Dolan.

"A spike in interest rates from current levels could potentially prick the housing bubble, which Fed Chairman nominee Ben Bernanke is convinced does not exist," said Peter Schiff, president of Euro Pacific Capital.

"If corporate malfeasance is bad for a firm's stock where senior executives run amuck, it should follow that government malfeasance should impact negatively a country's debt and currency," said David Gilmore, a partner in Connecticut-based currency consultancy FXA. "If it were only so easy ... exceptions are the rule not the exception."

"The key question for markets on pending indictments," said Gilmore, "is how far up the food chain they run?"

The two-year-old investigation is so far believed to be targeted at discovering whether Libby, Rove and others in the White House blew the covert Plame's cover because her ambassador husband, Joseph Wilson, had challenged intelligence Bush used to justify the Iraq war.

Resignations would be expected following any indictments and Bush would presumably move quickly to distance himself from the alleged leaks.

These developments come at a time when Bush's ratings have dropped to the lowest of his presidency, following the administration's handling of the emergency response to Hurricane Katrina, an Iraq war that is losing some popular support, high oil prices and a bungled Supreme Court nomination.

The exact course for financial markets is uncertain. Any reaction may be limited to a day or two, Gilmore said.

The best historical reference for investors may be the fallout of the Watergate scandal, which was limited to Nixon aides, although did ultimately lead to the president's resignation, said Dolan.

But the U.S. was just coming off the gold standard at that time, so currency markets behaved differently than they do today.

More recent memory reminds that the dollar was hammered leading up to and in the immediate wake of the impeachment of President Bill Clinton on perjury and obstruction of justice charges tied to the cover up of his affair with intern Monica Lewinsky.

Over a five-day period in January 1998 that followed the first mention of Lewinsky on Internet gossip site, The Drudge Report, the dollar shed a swift 3.3% against the German mark, the pre-euro proxy for European currencies. The dollar reclaimed that decline during the following week.

The greenback fell over several days to a four-month low against the Japanese yen during December 1998, when the House approved two articles of impeachment against Clinton.

But that example differs from the current situation somewhat, says Dolan, because it directly touched the president.

If anything, investors are looking for any excuse to lighten some dollar holdings; it's made a six-week charge without much pause against the yen, to two-year highs, driven almost exclusively by bets for higher U.S. interest rates. The dollar is just off three-month highs against the euro.

But the dollar never gets too far from the albatross of a huge U.S. financial imbalance, one that relies on foreign savings - buying U.S. debt -- to fund a shortfall in trade. These factors pushed the dollar to its lowest ever against the euro in late 2004.

Ultimately, however, financial market focus will return to how aggressive the Federal Reserve will be with interest rates, Beuzelin said.

Higher rates have helped the dollar recover this year. Bond yields are also rising, with short-term rates at over four-year highs and benchmark 10-year yields grazing six-month highs this week.

This story was supplied by MarketWatch. For further information see www.marketwatch.com.