By Jason Simpkins
Associate Editor
Central banks around the globe could launch an initiative to buoy the dollar, as the greenback’s continued slide seems to warrant foreign intervention.
“We’re on intervention watch,” Stephen Jen, head of foreign exchange research at Morgan Stanley (MS), said in an interview with Bloomberg News. “While I don’t think we have reached the threshold yet, the argument in favor of it is gradually becoming more compelling.”
The dollar has been in a freefall ever since the U.S. Federal Reserve began cutting rates in mid-September. Since then, the dollar has plummeted 15% against the euro and 14% against the yen. Last Thursday, the dollar fell below the 100 yen level for the first time since October 1995, which is the last time an international intervention effort was undertaken.
While a weak dollar has helped bolster a slumping U.S. economy by boosting exports, it is taking a heavy toll on the economies of Japan and the European Union by making foreign exports more expensive.
“We’re concerned about excessive exchange-rate moves in the present circumstances,” European Central Bank President Jean-Claude Trichet said last week.
His statement echoed the concerns raised by several EU finance ministers and Luxembourg Prime Minister, Jean-Claude Juncker, just a week prior.
“I am starting to become increasingly concerned and vigilant,” Juncker said at a meeting of European finance ministers. “Existing exchange rates do not give an adequate reflection of the fundamental data.”
Unfortunately the ECB doesn’t have much room to act in the way of rate cuts. Eurozone inflation climbed to 3.3% in February, and remains the bank’s primary concern. Now well beyond the region’s established guideline of just under 2%, inflation has forced the ECB to keep its rate at a six-year high of 4%, while the U.S. Federal Reserves ratchets its rates back even further in a desperate bid to get the economy back on track.
The Fed has slashed its rate by 2.25% in the past six months, taking the benchmark Federal Funds rate down to 3% from 5.25%. It’s a near certainty that Fed Chairman Ben S. Bernanke will reduce the rate again at tomorrow’s Federal Open Market Committee meeting. Futures on the Chicago Board of Trade show a 90% chance that the Fed will cut the federal funds rate by another 0.75% tomorrow (Tuesday).
And some economists see an even-more aggressive move.
Citigroup Inc.'s (C) U.S. economists on Friday said that they anticipate Federal Reserve policymakers will lower the benchmark Fed Funds rate by a full percentage point, taking it down to 2% from its current 3%, and said “and more cannot be ruled out,” CNNMoney.com reported.
Economists led by Robert DiClemente said “aggressive action is needed to stabilize the financial setting.” The economists said Friday’s near-collapse of Bear Stearns Cos. Inc. (BSC) “underscores the current fragility of the system.”
However, if the Fed does come through with another cut, the dollar could quickly be on its way to $1.60 per euro.
“The dollar’s fall will worry other markets, which are so fragile right now,” Jim O’Neil, chief economist at Goldman Sachs Group Inc. (GS), told Bloomberg. “Intervention will definitely be on the minds of policymakers.”
Finance ministers from the Group of Seven nations are set to meet in Washington, D.C., on April 11. That’s when O’Neil expects to see action.
“A change in the G-7 statement is highly likely in April,” O’Neil said. “Whether they can last until then without doing anything is another question.”
Value of the Dollar Vs. the Euro Over the Past Year
Money Morning Executive Editor William Patalon III contributed to this report.
News and Related Story Links:
- Bloomberg:Dollar Rebounds From Record Versus Euro on Intervention Concern
- Associated Press:Euro Zone Inflation Rises 3.3 Pct
- Money Morning:EU Policymakers Wary of an Overvalued Euro
- Money Morning: Dear Ben: To Save the U.S. Economy, Here Are the Moves You Need to Make Now.
- CNNMoney.com: Citigroup Sees Fed Lowering Funds Rate By 1 Point Next Week.