It’s everyone v the mighty greenback
Nations are being forced to go it alone in erecting defences against the relentless strength of the almighty greenback, with no sign that governments are willing to act in concert.
Fuelled by hawkish Federal Reserve policy, US economic strength and investors in search of a haven from falling markets, the US dollar is surging relentlessly against counterparts big and small by the most in decades. Japan has become the latest major country to step directly into the foreignexchange fray, joining nations from India to Chile that have been tapping their dollar stockpiles in the fight against the greenback.
While the problems in currency markets right now are in many ways reminiscent of the 1980s, the solutions are unlikely to be. Back then, the world’s economic superpowers agreed to tackle in unison the problem of persistent dollar strength, coming to an agreement in 1985 with the Plaza Accord. This time around, there’s little sign such a pact will be forthcoming as national economic interests diverge and the multidecade shift towards greater global integration is thrown into reverse.
Co-ordination along the lines of a fresh Plaza Accord would need to include the US administration and there is “close to 0 per cent probability on the Treasury intervening right now to weaken the dollar,” said Viraj Patel, a strategist at Vanda Research. “There’s tons of literature that shows ‘leaning against the wind’ in [foreign exchange] is a futile exercise when monetary policy is having the opposite effect.”
Japan’s intervention in the currency market to buy yen was very much a solo affair, with an official from the US Treasury confirming that it did not participate and the European Central Bank saying it was not involved.
The depreciation of everything from the euro to the South Korean won is adding fuel to inflation pressures across the world.
The Bloomberg dollar index, which measures the currency against a basket of both emergingand developed-market counterparts, hit fresh highs this week after the US central bank confirmed its determination to lift borrowing costs in a bid to slay inflation.
That broad-based dollar strength, combined with the market fallout from the latest Bank of Japan decision, evidently proved too much for the Japanese government. Officials in Tokyo amped up their fight on Thursday by acting directly to prop up the yen for the first time in decades. That’s even as its central bank bucked the global trend towards monetary policy tightening and kept official borrowing costs low.
Japan joins a growing group of countries that have taken direct action in foreign-exchange markets, including Chile, Ghana, South Korea and India. Switzerland’s central bank said at its policy decision on Thursday that it is prepared to intervene in foreign exchange if needed.
“It’s an ‘every man for himself ’ scenario right now because the world is much more fragmented today than in the 1980s,” said George Boubouras, a three-decade markets veteran and head of research at hedge fund K2 Asset Management. “The chances of global coordination to weaken the dollar are close to zero — expect to see more reverse currency wars.”