Two financial houses are expecting currency intervention

Section:

Or should that read 'praying for' intervention?

... As if the central banks haven't been
intervening in the markets every day for
years now!

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By John Fraher and Simon Kennedy
Bloomberg News Service
Thursday, March 13, 2008

http://www.bloomberg.com/apps/news?pid=20601087&sid=aOg5ATtR4yto&refer=h...

The dollar's record-breaking slide may trigger the first coordinated effort to prop up the currency in 13 years, say strategists at Morgan Stanley and Goldman Sachs Group Inc.

The currency today fell below $1.56 per euro and slumped to the lowest level in 12 years versus the yen. That has prompted complaints from European Central Bank President Jean-Claude Trichet and Japanese Finance Minister Fukushiro Nukaga. U.S. Treasury Secretary Henry Paulson said today he backs a "strong dollar" and refused to elaborate when questioned at a press conference in Washington.

The challenge for policy makers is fighting the $3.2 trillion-a-day currency market while the Federal Reserve cuts interest rates and the U.S. economy falters. With traders increasing bets on a weaker dollar, the Group of Seven nations may be compelled to act, some strategists said.

"We're on an intervention watch," Stephen Jen, Morgan Stanley's London-based head of foreign-exchange research, said in a telephone interview today. "While I don't think we have reached the threshold yet, the argument in favor of it is gradually becoming compelling."

The dollar today dipped below 100 yen for the first time since 1995, when the G-7 last stepped in to prop up the U.S. currency. It has lost 15 percent against the euro since September as the Fed's rate reductions dull the currency's allure. The slide has accelerated in the past two weeks, putting the euro at $1.5624.

Executives and politicians across the world say they're becoming increasingly worried about the dollar's decline.

... Watanabe anxiety

Toyota Motor Corp. President Katsuaki Watanabe said on March 7 the stronger yen is making conditions "tough" for the carmaker. Germany's MTU Aero Engines Holding AG, the largest independent provider of jet-engine maintenance, said today that the dollar's drop may "cancel out" the company's growth in euro terms this year.

The U.S. currency's drop may also infect other markets by further weakening confidence in U.S. assets, said Jim O'Neill, chief economist at Goldman Sachs. Morgan Stanley's Jen said the weaker dollar is already spurring higher commodity prices.

"The dollar's fall will worry other markets, which are so fragile right now," O'Neill said in a telephone interview today. "Intervention will definitely be on the minds of policy makers."

The dollar's drop accelerated after a Carlyle Group Inc. fund moved closer to collapse.

Any action by the G-7 would be the first since its governments united in September 2000 to boost a falling euro. The dollar sank as low as 79.75 yen in 1995 to prompt a rescue then.

... Concentrating on China

Since 2002, the G-7 has focused on lobbying China to stop meddling to weaken the yuan while leaving itself with some room to maneuver by noting its aversion to "excess volatility and excessive movements in exchange rates."

A united bid to aid the dollar may still not be around the corner. For now, a falling U.S. currency and surging euro are giving support to a weakening American economy by spurring its exports. It's also helping the ECB contain inflation, which is at a 14-year high of 3.2 percent.

Supporting the dollar may also prove futile as its decline partly reflects the Fed's cuts and the ECB's decision not to follow, said Chris Turner at ING Financial Markets.

The Fed has cut its main rate by 2.25 percentage points since September to 3 percent, while the ECB's rate is still at a six-year high of 4 percent.

... 'Worse' Than Nothing

"Failed intervention is worse than no intervention," said Turner, ING's head of currency research in London. "Policy makers have their hands tied and will defer to the global priority of the Fed slashing interest rates."

Japan may be more willing to step into markets at a time when its economy is deteriorating and as investors start to bet the Bank of Japan will cut rates by year-end, said Ashley Davies, a currency strategist at UBS AG in Singapore.

"Intervention could easily become consistent with monetary policy," said Davies. "We don't see any major reason why the Bank of Japan cannot resume."

Eisuke Sakakibara, dubbed "Mr. Yen" for his ability to influence the currency during his 1997-1999 tenure as a vice finance minister, is more skeptical. He told a conference in Tokyo on March 11 that the yen is still cheaper than when he sold dollars a decade ago.

"The yen is still pretty much weak against major currencies such as the euro," Sakakibara said.

... 'Excessive Movements'

Policy makers are still stepping up their rhetoric. Trichet said March 10 that he's "concerned" about the euro's surge, while Nukaga said today that "excessive movements" are undesirable.

O'Neill also senses a shift in the Bush administration's stance. Paulson said on March 7 that "the long-term fundamentals are strong, and I'm confident they'll be reflected in our currency market."

O'Neill said G-7 finance ministers may sound an alarm when they convene in Washington on April 11, perhaps by inserting Paulson's statement of support for the dollar.

"A change in the G-7 statement is highly likely in April," said O'Neill. "Whether they can last until then without doing anything is another question."

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