Officials in the U.S. and Europe concerned about the euro’s decline are cautiously talking about a policy tool they haven’t used in a decade: intervening in currency markets.
Policy makers have been content to let markets set the value of the euro, which has fallen about 17% since early December, worrying U.S. exporters who face European competition and raising fear of inflation in Germany. Expectations of the prospects of intervention pushed up the euro to near $1.26, after the currency had slipped below $1.23 earlier. Late in the day, the euro traded at around $1.25.
Marco Annunziata, chief economist at UniCredit in London, figures the euro would have to fall to about $1.10 in a week or so to prompt policy makers to act. Such a fall could shake markets globally, boost interest rates in Europe, and threaten to undermine a global recovery.
In a currency intervention, central banks buy large amounts of a weak currency in exchange for a strong currency, in hopes of reversing the weak currency’s decline. But interventions often fail.
Neither the U.S. nor the euro zone has intervened in currency markets since 2000 — and both have long been skeptical about the practice’s effectiveness. The U.S. joined Europe, Japan, Britain and Canada in buying $3 billion to $5 billion of euros in September 2000 during a bout of euro weakness shortly after its introduction. Two months later, the European Central Bank bought more euros, when the euro was trading at about 87 cents — slightly less than half the high of about $1.60 it hit in April 2008.
‘I’m really concerned about the rapid [pace] of the fall of the exchange rate,’ said Jean-Claude Juncker, the head of euro-zone finance ministers, on Thursday, though he said he didn’t think euro’s level required ‘immediate action.’
Ted Truman, a former international economics official in the Clinton and Obama Treasury departments, said that ‘it’s right for authorities to be thinking about possibly protesting’ the fall in the euro via intervention.
Though the U.S. and Europe have spent extraordinary sums to fight the global recession, and drastically eased monetary policy, they have left currency markets alone, figuring that the ups and downs of currencies should reflect fundamental economics.
Federal Reserve Board Gov. Daniel Tarullo suggested the Fed wasn’t pressing for an intervention. ‘We don’t have other action under consideration’ beyond the dollar swap lines to European banks that the Fed revived earlier this month, he said at a congressional hearing Thursday. Problems in Europe could become ‘another source of risk to the U.S. recovery,’ he testified.
Many economists believe the euro is trading at an appropriate level, given Europe’s troubled budget picture and diminished growth prospects. The 110 billion ($136 billion) Greek loan package, followed by a nearly $1 trillion loan commitment for other troubled European countries, underscored the region’s financial frailty and raised the possibility that the ECB could print money and devalue the currency. European wrangling over how tightly to regulate financial markets has also put downward pressure on the euro.
Some European officials say they believe a gradual fall in the euro is an economic plus because it will make European exports less expensive.
A decision to act can take many forms, with the simplest being statements by influential officials warning, in coded language, that they may intervene. In June 2008, Federal Reserve Chairman Ben Bernanke warned about the perils of a weak dollar. That gave the U.S. currency a brief lift, but the Fed never actually intervened. A sustained turnaround didn’t occur until more than a month later, when investors started flocking into the currency in search of havens.
Another possibility is a coordinated statement by a group of influential countries, as occurred in September 2000.
The goal of such statements is to produce the desired outcome without taking the chance on an actual intervention that could backfire. One risk of acting: Investors might believe policy makers have misdiagnosed why currencies are rising and falling or don’t have the will to deal with an underlying problem. That, in turn, could lead to even-more-jarring market moves.
A big wild card is the role of China, with its $2.5 trillion in reserves. The Chinese have long said they want to diversify their funds, which are heavily weighted to the dollar, by increasing the share of euros.
Analysts say there is a chance that China could be persuaded to participate in a globally coordinated effort to prop up the euro if other nations can convince Beijing the move is in its interests.
Harvard University economist Jeffrey Frankel said Chinese participation would give a powerful boost to any action. ‘If you intervened now [without China], markets would probably call the bluff and governments would lose,’ he said. ‘If we had the Chinese on our side, that $2.5 trillion in reserves could be intimidating, even to markets.’
But it is unlikely Beijing would join in. China Investment Corp., China’s $300 billion sovereign-wealth fund, didn’t buy Greek bonds earlier this year, which would have helped to ease the country’s problems. Jesse Wang, CIC’s executive vice president, said responsibility for a bailout lay with the European Union.
Bob Davis / Brian Blackstone / Dinny McMahon
美国联邦储备委员会(Fed) 理事塔鲁洛(Daniel Tarullo)暗示，美联储并未迫切要求进行干预。他周四在国会听证会上说，除本月早些时候针对欧洲各银行推出的美元互换额度外，美联储当前并未考虑其他举措。塔鲁洛在作证时说，欧洲的问题可能成为危及美国复苏的又一个风险源头。
表露行动决定可能有很多种方式，最简单的是由颇具影响力的官员暗示他们可能会进行干预。2008年6月，美联储(Federal Reserve)主席贝南克(Ben Bernanke)就美元走软的危险发出了警告。之后美元短暂走高，不过美联储实际上从来没有进行干预过。一个月之后，投资者开始涌入美元寻求避风港，直到那时才出现了一场可持续的反弹。