Market to G7: So What?

April 14, 2008

Currency markets are unimpressed with the new G7 language of concern about recent foreign exchange developments. Before the remarks, the dollar closed on Friday at 1.583/euro and Yen 101.8, and quotes at 18:45 GMT on Wednesday (14:45 EDT) were 1.5805 per euro and Y 101.2. That ho-hum reaction contrasts sharply with earlier big initiatives by the G7. Before the dollar rescue plan of November 1978, which introduced Carter bonds and hiked Fed interest rates sharply, the dollar had sunk to DEM 1.7030. The mark was trading at 1.865 within two days and at 1.938 within three weeks. Surrounding the Plaza Accord of Sept 22, 1985, the dollar fell from DEM 2.9145 on September 19th to DEM 2.71 on September 23rd and DEM 2.45 by end-1985. After record dollar lows of DEM 1.345 and Yen 79.85 were struck on March 8th and April 19th of 1995, then U.S. Treasury Secretary Rubin introduced a policy of intervention and verbal repetition of the phrase, “a strong dollar is in the U.S. best interest.” Those lows proved to be long-run turning points, and the dollar was trading at DEM 1.437 and Y 103.4 by end-1995. The biggest G7 currency initiative failure was the Louvre Accord, an agreement reached in February 1987 and intended to halt post-Plaza Accord depreciation in the dollar. Like this week’s G7 forex policy initiative, the intent of the Louvre Accord was to stabilize the dollar, not to reverse any of its previous losses. The dollar was at DEM 1.831 and Y 153.8 at the time of Louvre. Monetary policies were modified to enforce the Louvre Accord, which was a contributing factor to the worldwide stock market crash of October 19, 1987. In the adjustment that followed the meltdown of equities, the dollar sank to DEM 1.576 and Y 121.4 by yearend, 13.9% and 21.1% below its Louvre Accord parities.

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