Traders Expect Intervention Following Further Dollar Decline

As told in Bloomberg, currency traders anticipate the dollar will continue its slide until our trading partners decide they’ve had enough. Of course, the very expectation of intervention may limit the dollar’s fall, at least for a while.

My sources in Japan tell me that the officialdom still sees the yen as cheap, and the dollar’s decline as the result of conoditions internal to the US. That means they will probably drag their feet on any joint intervention.

From Bloomberg:

For the first time in 13 years, people who trade currencies say confidence in the markets to determine exchange rates is dwindling.

The crisis that may bring the so-called Group of Seven nations to coordinated intervention is the result of a sinking U.S. economy, the weakest dollar since 1971 and the biggest currency fluctuations this decade….

Even with the latest gain against the euro, strategists at Deutsche Bank AG in Frankfurt, the world’s biggest currency trader, say the dollar is likely to fall to $1.60 versus Europe’s common currency, from $1.5400 as of 10:40 a.m. in Tokyo, because of a recession. Royal Bank of Scotland Group Plc, the fourth-largest trader, says the risk of intervention is increasing and “would become severe” if the dollar depreciates below $1.60….

After the Federal Reserve’s U.S. Trade Weighted Major Currency Dollar Index declined to 69.2631 on March 18, the lowest in 37 years, Redeker said he sees parallels between now and 1995. That was last time central banks stepped in to arrest a slide in the greenback by purchasing and selling currencies to influence exchange rates….

The G-7, which comprises the U.S., U.K., Canada, Japan, Germany, France and Italy, said Feb. 9 that “excess volatility and disorderly movements in exchange rates are undesirable.” The group next meets April 12-13 in Washington.

Finance ministers and central banks object to rising volatility because it complicates the assessment of economies, interferes with monetary policy and gives companies little time to adjust by cutting costs….

The slump has accelerated since February, raising concern that international investors will avoid U.S. financial assets, making it harder for the Treasury to fund a growing budget deficit. Net sales of U.S. stocks and bonds by private foreign investors totaled $38.2 billion in January, the most since September, the Treasury Department said March 17….

For clues to when officials may intervene, watch the euro’s performance against the yuan, Adrian Schmidt, senior currency strategist in London at Royal Bank, said in a March 17 research report. The yuan fell to 11.2639 per euro last week, approaching its record low of 11.3076 in December 2004.

If the euro reaches a new high, “the probability of coordinated intervention” on the dollar “certainly increases,” Schmidt wrote. The bank’s analysis also shows the dollar is as weak now versus the euro as it was at the end of 2004.

The comparison to 2004 is important, Royal Bank says, because central banks cut back on their euro-denominated reserves after a big increase in the fourth quarter of 2004 and a rally in Europe’s common currency, setting the stage for the dollar to appreciate….

An effort to boost the dollar may not be imminent, according to Mansoor Mohi-Uddin, head of currency strategy at Zurich-based UBS AG, Europe’s biggest bank.

The depreciating dollar has made U.S. goods cheaper to foreigners. Exports climbed to a record $148.2 billion in January, the Commerce Department said March 11. A strong euro may help the European Central Bank contain inflation, which is at a 14-year high. And the yen is still about 40 percent weaker than its 1995 peak on a trade-weighted basis.

“America, Japan and Europe all still have good reasons for now to eschew intervention,” Mohi-Uddin said in a research report dated March 18.

The G-7 may find it politically difficult to support the dollar after lobbying China since 2000 to stop meddling in the foreign-exchange markets. China controls the yuan by buying foreign currency to limit the dollar’s rise, a strategy which has led to accusations from the European Union and U.S. that it’s keeping the currency undervalued.

“We’ve had four years of G-7 policy makers encouraging China to intervene less, so its going to be a bit difficult for them to intervene themselves,” said Jim O’Neill, head of global economic research at Goldman Sachs Group Inc., the most profitable securities firm….

The G-7 hasn’t acted together since September 2000, when they supported the euro after it dropped as low as 82.30 cents. The last time there was any action on the dollar was when it sank as low as 79.75 yen in 1995, sparking an 81 percent gain against Japan’s currency the next three years.

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One comment

  1. Anonymous

    Looks to me as if intervention already occurred. News last week was uniformly bad, but the dollar has a huge bounce???

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