US Dollar Intervention: Is it Possible?
June 9, 2008
Is intervention in the US dollar possible?
Well anything is possible in this world, but despite jawboning by Bernanke and Paulson, I do not expect physical intervention in the dollar by the US government.
The last time that the Federal Reserve intervened in the currency markets was shortly after the launch of the Euro. At that time, the currency fell to a low of 84 cents, triggering panic for the European Central Bank. In response to the sharp sell-off in the EUR/USD, the ECB convinced the Fed to jointly intervene in the currency markets to buy euros and sell US dollars. Since there has been no intervention for more than 7 years, stepping into the markets would represent a dramatic policy shift for the US government. The reason why talk of intervention has resurfaced is because the US government may be running of options.
Typically, raising interest rates is the most effective way to curb inflation, but with the labor market deteriorating and high energy prices threatening consumer spending, the Federal Reserve is reluctant to raise interest rates. This leaves strengthening the dollar as one of the easiest and possibly the quickest way to bring down inflation. Although I do not expect the US government to do more than jawbone the dollar, their bias for where the dollar should head is now clear. In the past, the Federal Reserve wanted the dollar to fall to boost exports and growth, but they have now flipped their stance and instead they want the dollar to rise.
Federal Reserve Chairman Ben Bernanke first hinted that FX intervention is possible last week and today US Treasury Secretary Paulson said on CNBC that the US government is not ruling out intervention.
Posted in Bernanke, dollar intervention, paulson
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June 9th, 2008 at 9:48 pm
[...] and Fisher have commented on the value of the US dollar. Their public agreement is a sign that the US Government wants the dollar rise and they are jawboning it at every [...]
June 28th, 2008 at 4:32 pm
US Dollar intervention is a better option than an interest rate hike. The price of oil is driving most of the inflation in the economy The Saudi/OPEC do not want to get paid in “cheap money” for a declining asset,i.e. the US Dollar and certainly don’t want to produce more oil for cheaper dollars. Since the price of a barrel of oil is denominated in USD, the Sauids want the price of a barrel of oil in Euro valuation. Since they can’t go off payment in US Dollar denomination, they raise the price of oil until the dollar amount is in parity with the Euro. US intervention brings dollar valuation up, Euro down, oil will come down in line. US firms have had two years to reap the lower US Dollar advantage and increased exports. That is over. The ECB will enjoy watching the intervention to see the Euro more competitive for exports without having to cooperate with the Fed. Good move Ben.
Raising interest rates would be a killer for the credit markets. If you don’t like sub-prime, your going to hate credit card defaults. Now you are really risking burying the over indulgent consumer. The banks would be at tremendous risk. Too close to the real Depression of the 30’s. Don’t go there Ben.
By the way, Ben, move it now.