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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: James F. Hopkins who wrote (23539)	8/21/1999 8:48:00 AM
From: Les H	Read Replies (3) \| Respond to of 99985

If Ever There Was A Time For Coordinated Forex Intervention, It Is Now Northern Trust Bank ntrs.com The U.S. economy is barreling along, starting to generate some inflationary pressures. The Japanese economy is in the infancy of a recovery with more deflationary impulses at work than inflationary ones. The dollar is depreciating against the yen, adding to U.S. inflationary pressures and adding to Japanese deflationary pressures. Now might be one of those rare occasions when unsterilized coordinated foreign exchange intervention makes domestic policy sense. Boiled down to its essence, a depreciating dollar relative to the yen means that there is an excess supply of dollars, implying an excess demand for yen. The way to put an end to the depreciation is for the Fed to sell some of its yen holdings for dollars and for the Bank of Japan to buy some dollars, paying for them with yen. One result of this coordinated unsterilized intervention would be to increase the supply of yen to satisfy the excess demand for yen, and to reduce the supply of dollars to mop up the excess supply of them. Another implication of this is that, all else the same, the supply of excess U.S. dollar reserves in the U.S. banking system would decline, putting upward pressure on the overnight fed funds rate. For an economy generating inflationary pressures, a higher fed funds rate is just what the central banker ordered. Across the Pacific, the supply of excess yen reserves in the Japanese banking system would increase, putting downward pressure on the unsecured call rate. The Japanese call rate already is very close to zero. It is unlikely it would trade in negative territory for any length of time. Rather, Japanese banks would likely use these additional excess reserves to buy short-dated paper, such as Japanese government securities. This would serve to increase the Japanese money supply, again, just what the central banker ordered for an economy on the verge of deflation. So, from a domestic monetary policy perspective, coordinated unsterilized foreign exchange intervention involving the Fed and the Bank of Japan makes a lot of sense right now. Of course, making sense lowers the probability that it will occur.