A Weak Dollar, Strong Yen, and Intervention

March 21, 2011

The dollar posted very similar average trade-weighted values in the 1990s and 2000s, but it is currently about 22% weaker than those mean decade values.  Last week’s yen peak of 76.25 per dollar was the Japanese currency’s strongest ever, and dollar came within 2% of a 10-year low against the euro.  The trade-weighted yen is almost 30% stronger than its average level during the noughties.  Although the trade-weighted euro also exceeds its mean value of the 00’s decade, the size of its gain is slightly less than 5%.

At this month’s low against the yen, the dollar was 78.7% weaker than its end-1970 level and 71.0% below its value on February 26, 1985.  At today’s low of EUR 1.422, the dollar DEM-translation value had depreciated 62.3% against the mark since end-1970 and by 60.4% since February 26, 1985.

Intervention had fallen out of favor.  When the Bank of Japan sold JPY 2.12 trillion in unilateral intervention on a single day last September, that was the first operation by the Japanese since March 2004.  Concerted intervention last Friday was the first time the Group of Seven engaged in coordinated currency market operations since September 22, 2000.  It is believed that Japanese authorities accounted for the overwhelming share of last week’s yen sales, doing about $25 billion.  The United States likely sold considerably fewer than $1 billion.  At the time of the previous concerted intervention somewhat over ten years ago, the intent was to counter selling pressure on the euro, which at the time was trading at $0.8750 and JPY 93.2.  The Fed’s contribution to the joint intervention back then was to buy roughly EUR 1.5 billion against a sale of USD 1.34 billion.

One reason for lessening foreign exchange intervention in recent years is the exponential growth of currency trading.  A forex turnover survey last year revealed global market volume to be about $4.0 trillion per day.  That’s up from $1.1 trillion per day in 2000. 

The heyday of intervention by Group of Seven governments occurred in the 1970s and 1980s.  U.S. intervention during the post-floating rate era of the Nixon and Ford administrations averaged $0.9 billion per year, and that figure rose to $3.1 billion per year in the first 21 months of the Carter administration.  November 1.  Two hallmarks of a dollar rescue package unveiled November 1, 1978 were more intensive intervention and a 100-basis point increase of the Fed’s key interest rates.  The dollar at that time had fallen to DEM 1.7050 and JPY 176.4.  Compared to those levels, the U.S. currency is now some 19% weaker against the mark and 54% weaker against the yen.  In November 1978, U.S. intervention was conducted on 12 different trading days and cumulated to $2.92 billion at a time when daily U.S. foreign exchange market volume in New York was about $11 billion.  Fourteen days in December 1978 saw intervention totaling another $2.80 billion.

Almost no U.S. intervention was done by the first Reagan administration, but that changed in his second term when Treasury Secretary Baker secured a G5 Plaza Accord with Britain, France, Germany, and Japan to secure a more competitive dollar.  Concerted intervention then and subsequently helped promote the dollar’s decline in 1985, 1986 and 1987 from DEM 2.477 to a low of DEM 1.576.  USD/JPY tumbled over those three years by 54% from 262 to 120.  The United States did around $2.2 billion of intervention in the four months following the Plaza agreement.  Gross foreign exchange turnover in the United States averaged $63 billion per day in March 1986.  Daily London turnover then was about $115 billion.

As a policy tool through the years, intervention by advanced economies has come and gone but mostly fallen into disuse.  I doubt its use last week signifies the start of another era of very active operations.  One primary reason for lessening use of intervention is that growth in daily currency market transactions has outstripped the means of authorities to assemble resources with a comparable clout to what could be used in the past.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.



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