Friday, March 14, 2008

Coordinated Intervention to Strengthen the Dollar?

I never thought I would see the day when observers are talking about coordinated intervention by policymakers to strengthen the dollar. Here is the FT commentary:

Selling the dollar is now close to a one-way bet. So great is concern about the health of the US financial system that the dollar traded below Y100 on Thursday, and above $1.56 against the euro. The danger of a dollar rout is rising, and the Federal Reserve, European Central Bank and Japan’s Ministry of Fi­nance should co-ordinate intervention to slow the greenback’s fall.

And here, the WSJ Real Times Economics blog reports Stephen Jen of Morgan Stanley is talking coordinated dollar intervention. Wow, if these suggestion come to fruition it would be like the Plaza Accord of 1985 in reverse.

Of course, as Brad Sester notes, the dollar is already being propped up by monetary authorities in Asia and oil-exporting countries. Based on the FT's commentary, it sounds like the calls for coordinated intervention are intended for the G7 nations. Unless the Asian and oil-exporting countries change policies, however, I fear a coordinated propping up of the dollar will only add to global economic imbalances... everyone seems afraid of the needed adjustments.


  1. A few thoughts..
    Large exchange rate volatiliy is one of the biggest problems with our current exchange rate sytem. I would prefer to see coordinated internvention by poicy makers to address this issue. As you mentioned, people are afraid of the neccesary adjustments, and fear seems to be controlling the markets lately. I also fear that intervention could add to the problem or create new problems.

    While the Plaza Accord was successful in many regardds it did lead to a 10 year depression in Japan.

    It seems to me that interventions usually happen durring difficult times, lead to good times, but often create problems that drive more dificult times.

    It is obvious that there is a greater need for economic coordination. It is unfortunate that it only becomes an issue when it starts affecting people's wallets.

  2. Anonymous:

    Your comment on the problems the Plaza Accord caused Japan later started me thinking. Many of the calls for coordinated policy intervention since post WWII can in some way be traced back to the U.S. misuse of its currency reserve status/monteary hegemon role.

    (1) Fall of Bretton Woods
    (2) Plaza Accord--a response to high dollar from high interest rates in early 1980s that, in turn, came from the need to reverse abuse of dollar's reserve status during Bretton Woods and the 1970s (high inflation a symptom of that abuse).
    (3) Today. Asian and oil-exporting countries peg to dollar and allow for stronger dollar than would otherwise be the case. Throw in recent productivity advances that keep price pressures down, and monetary mischief is at play.

    I may be simplyfing matters here, but in short the U.S. has not always behaved well with its reserve currency status.