A bailout for the dollar too?


Fears about the greenback
are building, but currency
experts say a bailout by
central banks isn't likely.

By David Ellis
Friday, March 21, 2008


NEW YORK -- Could the dollar be next in line for a bailout?

That question has been the subject of discussion among currency experts after the greenback suffered a steep decline against a host of different currencies in recent weeks.

But it's one thing to talk about a rescue. It's another to pull one off.

"Given all the forces waging against the dollar at the moment, the question of success is another matter entirely," said Neil Mellor, currency strategist at Bank of New York Mellon.

Fears of further fallout in financial markets last week sent the greenback cascading to successive historic lows against the euro and levels against the yen not seen since 1995.

That only gave credence to speculation that foreign central banks could step in and buy the dollar to help prop up its value.

Stephen Jen, Morgan Stanley's head of foreign exchange research, said last week that the dollar is on "intervention watch" because of its recent weakness.

But hurdles to a bailout remain. For one, the world's central banks are not on the same page when it comes to monetary policy.

The Federal Reserve, trying to keep the U.S. economy from tipping into a recession, is cutting interest rates. On Tuesday, it lowered rates by three-quarters of a percentage point to 2.25% - its sixth cut in six months.

These rate cuts are one factor behind the dollar's weakness since they make debt and other investments pegged to the dollar less attractive.

Meanwhile, other monetary policymakers, including the European Central Bank and the Bank of England, have held rates steady recently to keep inflation in check.

Divyang Shah, a strategist for foreign exchange and fixed income at Commonwealth Bank in London, argues that a bailout can't work with such divergent policies.

If the Fed is "injecting liquidity, that is not an environment for any intervention to work," he said.

Typically, a bailout entails central bankers ramping up the reserves of whatever currency they are trying to support.

... New world, new challenges

The last time central banks staged a coordinated intervention was in September 2000. That's when the Federal Reserve and the Treasury Department -- along with the European Central Bank and other monetary authorities -- bought euros after that currency suffered a steep decline against the dollar.

But since then, there has been a dramatic shift in the global economy and the flow of U.S. dollars, argues Greg Anderson, executive director of foreign exchange at ABN AMRO in Chicago.

Today, much of the world's dollar reserves are held not only by Group of Seven central banks but also by the fastest growing economies around the globe, including India and China as well as oil producing nations like Saudi Arabia, whose primary export and source of wealth -- oil -- is priced in dollars.

Ultimately those countries would have to be patched in to pull off a bailout, said Anderson, which could prove difficult to coordinate.

"If there is an intervention, these groups would have to be involved," he said.

Do we really need a bailout?

The subject of the weaker dollar is expected to be a topic of discussion at the next Group of Seven meeting scheduled for April.

But U.S. officials may say "thanks, but no thanks" to a coordinated intervention.

There's a one word answer why: exports.With the economy creaking underneath the weight of the housing crisis, a surge in the sale of U.S.-made goods to other nations has been a bright spot. Last week, the Commerce Department reported a surge in export activity in its January trade report.

Rescuing the dollar would ultimately eliminate one of the few areas of strength for the U.S. economy, said Commonwealth Bank's Shah.

"If you look at what the Fed is doing in terms of conventional and unconventional moves to install confidence, why would you want to cut off another for [economic] stimulus?" he said.

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