You can tell a long weekend in approaching in the US. Most of the interesting news tonight is from Asia, although in this case, via the Financial Times.
Reader Matt D waxed eloquent in comments yesterday about FT reporter Krishna Guha, who provided insight into the Fed staff’s reading of the tealeaves, which was more downbeat than that of the FOMC. I took that as a bit of a chiding for not mentioning Guha’s name in my post.
Today, Guha again found a juicy tidbit, this one in reported in the Nikkei, that the US, Japan, and the EU had developed a plan ofr coordinated currency intervention to support the dollar around the time of the Bear crisis.
Note that the track record of currency intervention is not very successful, but in part, that results from the fact the party trying to defend its currency is usually a country with a lot of foreign debt, which means they have been running a current account deficit for a while and have little to nada in the way of FX reserves. So the currency traders know if they keep hammering long enough, the sap trying to shore up its currency will run out of firepower.
Coordinated intervention in theory has better odds, but in practice can also be an exercise in futility. As Paul Krugman noted:
…. the usual problem with such intervention applies: the financial markets are so huge that even big interventions tend to look like a drop in the bucket. If foreign exchange intervention works, it’s usually because of the “slap in the face” effect: the markets are getting hysterical, and intervention gives them a chance to come to their senses.
So interventions are likely to work only if the markets are behaving irrationally. Per a VoxEU post we featured yesterday, a weaker dollar is, in the long run, in the offing.
From the Financial Times:
The US, Europe and Japan discussed the possibility of co-ordinated currency intervention to support the dollar during the Bear Stearns crisis in March, according to Japan’s Nikkei online.
The US Treasury declined to comment on the report, which claimed the G7 had considered issuing an emergency communiqué during the weekend of March 15-16.
The Financial Times was unable independently to verify the Nikkei report. A G7 official said he understood there were some preparations for possible currency intervention during that period, but did not comment on any international talks.
As reported earlier in the FT, US and European policymakers have been concerned at various stages of the credit crisis about the possibility that, in an environment of persistent dollar weakness, a crisis at an individual financial institution could trigger a disorderly plunge in the US currency…
This concern was acute at the time of the Bear Stearns crisis. G7 policymakers were in contact then and discussed potential spillovers in international markets.
However, in the event there was no emergency G7 statement. The G7 waited until their scheduled meeting on April 11 when they expressed concern about “sharp fluctuations in major currencies” and “their possible implications for economic and financial stability”. They added: “We continue to monitor exchange markets closely, and co-operate as appropriate.”
This statement marked a shift in international currency policy. Hank Paulson, US Treasury secretary, remained generally sceptical about currency intervention, but was careful not to rule it out in all circumstances.
Prior to March, US and European officials were at odds over currencies,…
However, following the April 11 G7 meeting, US and European officials told the FT they were united in their support for a stronger dollar. Ben Bernanke, Federal Reserve chairman, joined Mr Paulson in talking in public about the US currency.
Policymakers believe a crisis at a financial institution is less likely to trigger a run on the dollar in an environment of general dollar strength. A stronger dollar also helps to curb oil and inflation, and support confidence in US assets.
Without another Bear Stearns-style crisis, currency intervention is unlikely, but if a similar crisis were to occur again and the dollar were to weaken precipitously, co-ordinated intervention is possible.
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Thanks for having such a great blog Yves!
My glowing commentary about Krishna Guha was aimed at those who fail to even read his columns or understand that it is possible to know quite a bit about the vigorous debates within the Fed over these pressing issues.
My view is that his sources within the Fed have developed to such a point that the very highest levels are now using him to selectively leak critical stories and trial balloons. He continually scoops the NYT and WSJ in this regard.
I remember some time ago causing a Fed official, who would later go on to be staff director of monetary policy for the Fed’s open market desk, to bust out laughing with my imitations of the drivel that Lindley Clark, Fed beat reporter for the WSJ, used to pass of as “reporting”.
We had to put up with his gibberish for 20 years….
Now, thankfully, we have a reporter who is less married to what the clearly isolated St. Louis Fed feeds its unwitting contacts in the US media.
The Fed here is clearly sending another message to the markets with this well-timed story to carefully consider the consequences before getting prematurely “cute” with the dollar in the face of any coming GSE restructuring, lest they face a rather nasty short squeeze.
Again, Krishna Guha is a reporter’s reporter from the old school who works his sources tirelessly for a living.
Matt Dubuque
Phase One may be the “coordinated, multi-national monetary policy objective to support currency A”.
Followed by Phase II which would be the “trans-national efforts to support currency and financial stability in the industrialized west”.
Followed by the outright merging of the US-J-EU monetary systems (and their allies), being the Coordinated International Monetary Alliance to Provide Global Economic Stability.
There goes America.
Let’s just call it implementing the Basel II.
The dollar has one way to go, burdened by a ballooning weight of debt…. down, down, down. No doubt, stop gap measures will take place, such as what this story illustrates. Like housing, everything will find its natural new equilibrium based on supply and demand… and supply of dollars is exploding each week as the Treasury funding requirements grow more and more and more and more….. God help us if the foreign central banks ever tire of this many dollars. It’s like a Company ever increasing its stock base, diluting current shareholders….. I wait with baited breathe for the naivetes/apologists ( those very same folks who probably believe that annulized inflation was 1.2% this morning as factored in to Q2 GDP… ) to ridicule this story and brand all those who discuss it with the label “conspiracists”….
The markets can be affect/manipulated but the overall trend cannot be. World markets are just to big to overpower. Happy talk, intervention, misdirection only forestall the eventual outcome. And with the dollar it is down down down.