Dollar's decline may prompt joint intervention, Morgan Stanley says
By Stanley White Bloomberg NewsPublished: November 5, 2007
TOKYO: The decline of the dollar to record lows might turn into a "more violent correction" that requires the United States, the European Union and Japan to intervene in foreign exchange markets, analysts at Morgan Stanley say.
Coordinated intervention could occur after the U.S. Federal Reserve has finished cutting interest rates and the European Central Bank has ceased raising them, according to Morgan Stanley, the investment bank.
Japan might act if the dollar approached ¥100, the bank added. But the three major economies are unlikely to intervene as long as the euro stays below $1.50, it said.
"The dollar could potentially weaken meaningfully further," two Morgan Stanley analysts, Stephen Jen and Charles St-Arnaud, wrote in a note sent to clients late last week. "Though coordinated interventions may not be an immediate threat, they should now be on our radar screen."
The dollar index, a measure of the U.S. currency against six others, fell to 76.331 on Friday, the lowest reading since it was created in 1973 and down from 77.03 at the end of the previous week.
The euro traded at $1.4505 at the close of trading in New York, up from $1.4393 a week ago. The dollar bought ¥114.853, little changed on the week.
Weakness in the dollar has been caused by concern that a slowing economy will lead to lower interest rates and spur investors to diversify into developing countries, Jen and St-Arnaud wrote.
The decline might continue "unless it's stopped," they said, because trade and investment flows rarely offset large currency moves. In the past 30 years, coordinated intervention caused all but one of the changes to the dollar's long-term trend, they wrote.
"The natural economic mechanisms that should, in theory, have helped halt the dollar sell-off were not, in fact, usually strong enough," the Morgan Stanley analysts said. "This is why multilateral interventions were usually required to facilitate the re-alignments of exchange rates."
Policy makers intervene in currency markets by arranging purchases or sales of foreign exchange. While the U.S. Treasury secretary, Henry Paulson Jr., has said repeatedly that a strong dollar is in America's interest, he also says the value of currencies should be set by the market. Under President George W. Bush, the Treasury has never intervened in the currency market.
The Fed on Wednesday lowered its target rate for overnight loans between banks by a quarter-percentage point to 4.5 percent to prevent the housing market from pulling the world's largest economy into recession.
The European Central Bank will be more likely to intervene in the currency markets once it does not have to limit inflation and money supply growth, Morgan Stanley said. The ECB will keep borrowing costs on hold at 4 percent when it meets Thursday, according to a Bloomberg News survey.
The ECB bought euros in November 2000, seeking to support the currency when it fell below 90 cents, following its introduction the previous year.
Japan might intervene to deter speculators from buying the yen, mirroring its joint intervention with the United States to prop up the yen after it declined to an eight-year low June 17, 1998, Morgan Stanley said. At that time, the dollar traded at of ¥146.78.
Japan has not sold its currency since March 16, 2004. It last bought yen in 1998.
Jobs help Canadian dollar
The Canadian dollar surged to a record, posting the biggest weekly gain against its U.S. counterpart in three years, as a strengthening economy increased expectations that the Bank of Canada would hold interest rates steady.
The currency rose 1.7 percent Friday after a government report showed that the economy added five times more jobs than forecast in October and the unemployment rate fell to a 33-year low.
"Canadian domestic demand remains very firm," said David Watt, a senior currency strategist at RBC Capital Markets in Toronto, who raised his year-end forecast for the U.S. dollar to 93.53 Canadian cents, from 97 Canadian cents. "Global economic growth remains solidly expansionary, supporting cyclically sensitive currencies such as the Canadian dollar."
The Canadian dollar advanced 2.9 percent last week to $1.0698, the biggest gain since Aug. 12, 2004. One U.S. dollar buys 93.48 Canadian cents. |
