Reply #40: Who blinked last? (intervention commentary)

[UpInArms]

http://m1.mny.co.za/WGETrnd.nsf/0/C2256A2A0056310742256F6B005A7B3A?OpenDocument

The role of central bankers in managing currency values has come under intense debate in the past month, leaving the more normal business of announcing changes in interest rates in the background. In South Africa, however, the Reserve Bank has maintained a stony silence over any kind of official approach to the rand, which has now been blamed for years as hemorrhaging profits in the country’s export sector.

The muscle-bound rand is currently hovering just above six-year highs to the dollar, the world’s reserve currency. Reserve Bank governor Tito Mboweni, along with his political boss, finance minister Trevor Manuel, has said, in essence, that the value of the rand must be set by markets. The challenge, however, is that the dollar, which has been in a protracted bear market for 36 months, is largely the driver for currency values everywhere.

<snip>

On Monday, December 6, the Frankfurt-based European Central Bank (ECB) and 12 European finance ministers published a rare joint statement, in which it was insisted that the US take steps to at least halt the decline of the dollar. The all-but-official currency war can be traced to November 8, when ECB president Jean-Claude Trichet called the euro’s rise to around $1,30 “brutal and unwelcome.” It was another central banker commenting directly on currency value.

The Federal Reserve has indicated zero interest in intervening in currency markets, a place where interventions have an appalling record. The Bank of Japan (BoJ), which wants a weak currency, like most exporting countries, in order to promote competitiveness, bought ¥14,8-trillion ($138-bn) worth of foreign currencies, mainly dollars, during the first quarter of 2004. The deed, without doubt the largest-ever act of intervention by a central bank, failed and the BoJ exited foreign exchange markets, for the first time in years.

Paul McCulley of Pimco, the world’s biggest bond fund, says that “strictly speaking,” it is impossible for a country to have both an interest rate policy and a currency policy, even though one influences the other. The “dominant channel of influence” says McCulley, “is the inflation rate.”

...more...