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Why a Dollar Intervention May Be Coming Soon Part II
by Stalion on Fri Mar 21, 2008 1:54 am
Today’s comment is by Sean Hyman, The Sovereign Society’s Currency Director.
Good Day Currency Traders!
As I said on Monday, currency interventions do happen. And it’s very possible that one could be coming for the dollar, still laughingly called the “world’s reserve currency.”
In fact, I can see central bankers around the world rolling up their sleeves and pitching in to prop up the dollar’s worth as early as the next month’s G-7 meeting.
Why would they bother? Simple. It’s because a stronger dollar would benefit their economies.
See, this isn’t charity work for the central bankers. They aren’t just doing the U.S. a favor – they’re looking after their own economic interests. The other economies around the world can’t support these extreme exchange prices permanently. So everyone’s got an incentive here to prop up the dollar.
Desperate Times Call for Desperate Dollar Actions
There’s never been a better time to intervene on the dollar’s behalf. The dollar sentiment has never been more bearish. Central bankers want to intervene when the sentiment is as bearish as it can get. That way, central bankers can “catch the world off guard” and shock the markets. This way, central bankers can force the markets upward, and get more “bang for their intervention buck.”
Right now they know that fundamentalists see the poor economic conditions and most traders are dumping dollars with both hands. The technicians see that the dollar trend is down and the relative strength has been dropping off for quite a while now. So it’s a great time to intervene.
They’ve got to do something soon. The dollar has weakened 12% against the euro and 14% against the yen since the Fed started cutting rates in September.
Verbal Interventions Are Already in Place
Verbal interventions have already started taking place. So these are the warning signs of what may be to come soon. For instance, let’s look at some of their recent comments:
Japan’s Finance Minister said last Thursday that abrupt currency moves are ''bad'' for economic growth. Economics Minister Ota said excessive fluctuation is ''undesirable,'' though they reflect dollar weakness rather than yen strength. European Central Bank President Trichet said on March 10th that ''the euro's surge still concerns him.''
Treasury Secretary Paulson said last week that ''a strong dollar was in the national interest.''
So you can tell that they all wish for something to happen and soon. The falling dollar is causing problems everywhere. Mr. Jen from Morgan Stanley wrote:
First, the lower dollar is driving up commodity prices. “There is a vicious circle between (i) the falling dollar, (ii) rising commodity prices, (iii) the impression that inflation is high and rising in the world, (iv) the world having to remain vigilant on inflation by keeping interest rates high and currencies strong, and (v) the dollar falling as a result of this and a hyper-proactive Fed.”
Bottom line: I believe you’ll see support for the dollar in the upcoming weeks to months. Possibly as soon as the April G-7 meeting. These interventions don’t ensure that they are the “exact” turnaround spot for the buck. But history tells us that any “collective” intervention from a group of central banks could be the beginning of a turnaround.
Currencies love rising inflation because eventually you have to tackle inflation by taking back rate cuts and eventually hiking rates.
Traders ran with that “inflationary” stance on Tuesday and drove the dollar higher. But whether the rally is sustainable is doubtful.
What I Say:
Remember that commodities like oil, etc. are priced in dollars. If the economy is slowing (and continue to do so) as the Fed estimates, then there may be less “demand” for oil. If so, then the price of oil should trade downward. This is what it did upon the news.
Oil and other commodities working their way down, pushes up the dollar against them. Therefore, this also brought down foreign currencies against the dollar like the euro, pound and yen. Now these pullbacks may be temporary but that’s why they happened.
So just as traders got comfortable again with their “one way bet” for the euro and against the buck, (buying the EUR/USD), the trade changed. Now the buck is going up against the euro.
But that’s understandable, considering the euro has enjoyed such a huge run…partially because of the euro’s superior fundamentals to the buck and partially because the euro is the “anti-dollar” or the dollar’s alternative currency. The EUR/USD currency pair has gone into the stratosphere lately as it approached the 1.60 level.
In the longer term, the dollar still has huge problems, such as a Fed that doesn’t support its currency and also continues to print money at an alarming pace. Their policies will continue to devalue the currency in the long term. Unless this changes, the long-term fate of the greenback won’t change either.
Good Day Currency Traders!
As I said on Monday, currency interventions do happen. And it’s very possible that one could be coming for the dollar, still laughingly called the “world’s reserve currency.”
In fact, I can see central bankers around the world rolling up their sleeves and pitching in to prop up the dollar’s worth as early as the next month’s G-7 meeting.
Why would they bother? Simple. It’s because a stronger dollar would benefit their economies.
See, this isn’t charity work for the central bankers. They aren’t just doing the U.S. a favor – they’re looking after their own economic interests. The other economies around the world can’t support these extreme exchange prices permanently. So everyone’s got an incentive here to prop up the dollar.
Desperate Times Call for Desperate Dollar Actions
There’s never been a better time to intervene on the dollar’s behalf. The dollar sentiment has never been more bearish. Central bankers want to intervene when the sentiment is as bearish as it can get. That way, central bankers can “catch the world off guard” and shock the markets. This way, central bankers can force the markets upward, and get more “bang for their intervention buck.”
Right now they know that fundamentalists see the poor economic conditions and most traders are dumping dollars with both hands. The technicians see that the dollar trend is down and the relative strength has been dropping off for quite a while now. So it’s a great time to intervene.
They’ve got to do something soon. The dollar has weakened 12% against the euro and 14% against the yen since the Fed started cutting rates in September.
Verbal Interventions Are Already in Place
Verbal interventions have already started taking place. So these are the warning signs of what may be to come soon. For instance, let’s look at some of their recent comments:
Japan’s Finance Minister said last Thursday that abrupt currency moves are ''bad'' for economic growth. Economics Minister Ota said excessive fluctuation is ''undesirable,'' though they reflect dollar weakness rather than yen strength. European Central Bank President Trichet said on March 10th that ''the euro's surge still concerns him.''
Treasury Secretary Paulson said last week that ''a strong dollar was in the national interest.''
So you can tell that they all wish for something to happen and soon. The falling dollar is causing problems everywhere. Mr. Jen from Morgan Stanley wrote:
First, the lower dollar is driving up commodity prices. “There is a vicious circle between (i) the falling dollar, (ii) rising commodity prices, (iii) the impression that inflation is high and rising in the world, (iv) the world having to remain vigilant on inflation by keeping interest rates high and currencies strong, and (v) the dollar falling as a result of this and a hyper-proactive Fed.”
Bottom line: I believe you’ll see support for the dollar in the upcoming weeks to months. Possibly as soon as the April G-7 meeting. These interventions don’t ensure that they are the “exact” turnaround spot for the buck. But history tells us that any “collective” intervention from a group of central banks could be the beginning of a turnaround.
Currencies love rising inflation because eventually you have to tackle inflation by taking back rate cuts and eventually hiking rates.
Traders ran with that “inflationary” stance on Tuesday and drove the dollar higher. But whether the rally is sustainable is doubtful.
What I Say:
Remember that commodities like oil, etc. are priced in dollars. If the economy is slowing (and continue to do so) as the Fed estimates, then there may be less “demand” for oil. If so, then the price of oil should trade downward. This is what it did upon the news.
Oil and other commodities working their way down, pushes up the dollar against them. Therefore, this also brought down foreign currencies against the dollar like the euro, pound and yen. Now these pullbacks may be temporary but that’s why they happened.
So just as traders got comfortable again with their “one way bet” for the euro and against the buck, (buying the EUR/USD), the trade changed. Now the buck is going up against the euro.
But that’s understandable, considering the euro has enjoyed such a huge run…partially because of the euro’s superior fundamentals to the buck and partially because the euro is the “anti-dollar” or the dollar’s alternative currency. The EUR/USD currency pair has gone into the stratosphere lately as it approached the 1.60 level.
In the longer term, the dollar still has huge problems, such as a Fed that doesn’t support its currency and also continues to print money at an alarming pace. Their policies will continue to devalue the currency in the long term. Unless this changes, the long-term fate of the greenback won’t change either.
