Currency Intervention Revived as Odds of Fed Easing Escalate
Just eight months ago, Brazilian Finance Minister Guido Mantega declared a “truce” in competitive currency devaluations. Now, Japanese and Swiss moves to weaken the yen and the franc show reviving tension in foreign-exchange markets as the deteriorating U.S. economy weighs on the dollar.
Japan sold yen today, causing the currency to weaken more than 4 percent against the dollar after rising 5 percent last month. “Ongoing one-sided moves” would hurt the recovery from a March earthquake, Finance Minister Yoshihiko Noda said. Yesterday, the Swiss National Bank cut interest rates to rein in the franc after a gain of about 36 percent in the past 12 months.
Europe’s sovereign debt crisis and the battle between Republican leaders and U.S. President Barack Obama over the budget and borrowing limits drove investors to the perceived safety of yen and francs. The risk of a U.S. return to recession, forcing the Federal Reserve to another round of monetary easing, has exacerbated dollar weakness. The currency’s drop last year left all of Asia’s 10 biggest economies seeking to influence their own exchange rates to aid exporters and growth.
‘A New Stage’
“We seem to be entering a new stage of the currency wars where it’s not just the emerging markets that are responding to broad dollar weakness,” said Callum Henderson, global head of currency research at Standard Chartered Plc in Singapore, who has written books on currency markets. “Expect much more intervention in the future and further acrimony in terms of how the U.S. dollar is doing.”
(For a related story on Japan’s move, click here. To read a story on Switzerland’s currency woes, click here.)
The U.S. economy shows signs of slowing, say five of nine economists on the academic panel that dates recessions. Harvard University economics professor Martin Feldstein, a member of the Business Cycle Dating Committee of the National Bureau of Economic Research, sees a 50 percent chance of another recession.
Finance officials from Group of Seven nations held a conference call yesterday to discuss the European sovereign debt crisis and the U.S. political stalemate over raising the borrowing ceiling, according to a G-7 official.
A government report tomorrow may show the U.S. unemployment rate held at 9.2 percent in July, according to the median forecast in a Bloomberg survey, up from 8.8 percent in March. Barclays Capital economists cited “QE3 speculation picking up” ahead of the Fed’s Aug. 9 policy meeting, referring to a third round of quantitative easing, where the Fed mounts asset purchases.
Among the 16 major currencies, the Swiss franc, New Zealand dollar, yen, Brazil’s real and Singaporean dollar have gained the most against the U.S. currency in the past three months, according to data compiled by Bloomberg. The euro has tumbled more than 3 percent against the greenback. The European currency dropped 0.7 percent today versus the dollar to $1.4229 as of 13:12 p.m. in London.
Brazil’s Mantega said Nov. 30 that his nation’s currency was trading at a reasonable level as Europe’s worsening debt crisis brought a “temporary truce” to a global currency war. Since then, the real has gained about 10 percent against the dollar, and Mantega said last month that the so-called war was still on.
Mantega’s complaint followed Fed Chairman Ben S. Bernanke’s August 2010 statement in Jackson Hole, Wyoming, that policy makers would provide more stimulus if needed. The statement, which the Fed followed up with a decision in November to buy $600 billion in Treasuries, sparked outrage from countries including Brazil that devalued currencies to counter the effects of capital flows to emerging markets.
Brazil buys dollars to limit gains in the real and has also introduced rules aimed at discouraging bets on dollar weakness. The South American nation said on Aug. 2 that it will provide $16 billion in tax breaks and toughen trade barriers to protect manufacturers hurt by a currency rally that’s fueling a surge in imports from China.
Latin American finance officials plan to gather this month to discuss ways to protect their currencies and economies from the turmoil in the U.S. and Europe.
The Bank of Japan today expanded an asset-purchase fund that includes government bonds, real-estate investment trusts and corporate debt to 15 trillion yen from 10 trillion yen. It also boosted a program aimed at encouraging banks to lend by 5 trillion yen, bringing it to 35 trillion yen.
The yen depreciated more than 4 percent against the dollar, the biggest decline since a 6.1 percent drop on Oct. 28, 2008, before trading 3.6 percent lower at 7:15 a.m. in New York.
In New Zealand, Finance Minister Bill English said that the government can do little to alter the currency’s course after it rose to 88.43 U.S. cents on Aug. 1, the most since exchange-rate controls were removed in 1985. New Zealand’s central bank doesn’t comment on currency intervention, spokesman Mike Hannah said when asked if Japan’s move has affected the Reserve Bank of New Zealand’s currency actions.
The central bank should seriously consider intervention should the New Zealand dollar remain in the high 80s over “coming weeks” while export commodity prices slide, Roger Kerr, who advises on currencies as owner of Asia-Pacific Risk Management, wrote in a column this week on interest.co.nz, an online financial news provider.
Currency gains may mean that central banks in nations including New Zealand, Canada and Australia tighten monetary policy at a slower pace than they otherwise would, said Sue Trinh, a senior currency strategist in Hong Kong at Royal Bank of Canada.
“It manifests itself by more pushing back or delaying of any planned rate hikes as opposed to outright intervention to weaken their respective currencies,” Trinh said. “You’re seeing that already. The Bank of Canada has been pushing out its tightening campaign, the Reserve Bank of Australia is taking on a protracted pause in its tightening cycle and there are question marks on how aggressively the Reserve Bank of New Zealand is able to hike as well.”
South Korea’s government is reviewing “all possibilities” on curbing capital inflows, Finance Minister Bahk Jae Wan told reporters in Seoul today, adding that he’s “closely monitoring” the situation, while declining to comment on the impact of Japan’s intervention.
The Philippines is prepared to impose controls to cap volatility in the peso after its currency rose to a three-year high this week, central bank Governor Amando Tetangco said in an e-mail late yesterday. The bank “will not go against the fundamental currency trend but will not hesitate to use tools, including imposing prudential limits on certain transactions of banks,” he said.
Turkey’s central bank said today it will sell dollars to banks when it sees it’s necessary to support foreign exchange liquidity in the domestic market. Policy makers there unexpectedly lowered their benchmark interest rate to a record low of 5.75 percent today after an emergency meeting of the monetary policy committee.
At Standard Chartered, Henderson highlighted that Japan and Switzerland were both members of the Group of 10 nations, signaling a shift from the early 2000s when the G-10 countries didn’t intervene, with the exception of Japan. “The currency wars will continue to bubble along and get worse.”
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