Wednesday, April 23, 2008

could the g7 be considering a currency intervention?

g7 meeting participants seem to feel the recent g7 statement was something much bigger than markets have treated it. french finance minister christine lagarde likened the statement to the 1985 Plaza Accords, which was of course a monumental event for the currency markets. others have said the markets misunderstood the gravity of the statement.

this has me thinking that a major round of currency intervention is in the realm of possibility, even though this apparently was not discussed at the time by g7 participants.

of course, for a market that trades $3 trillion per day, intervention has only symbolic value unless it is backed by policy actions, such as the fed ending its rate cuts. this reality could affect the timing of any decision to intervene.

moreover, it is usually best that intervention occur when some sort of pain threshold has already been reached for speculators, which is obviously not now the case. in other words, the best time to intervene is when the market has already begun to move in the desired direction. losses make a speculator honest.

a rally in the dollar would dent the commodity rally and benefit nations worldwide. in light of food shortages and the problems associated with energy costs, it behooves the g7 and other nations to interrupt the commodity rally, to make it less than the one-way bet it has become. this can be accomplished with a reversal in the dollar.

a key factor shaping the dollar's drop is diversification, with the dollar moving from 70% of reserve assets to about 63%. the euro has ascended from 20% to 27%, which means there is room for this sort of diversification to continue. nevertheless, it is time to slow it and break the back of the commodity bubble, which is rooted in part in the weakness of the dollar.

No comments: