Submitted by cpowell (GATA) on Thursday, July 18, 2019. Section: Daily Dispatches <\/p>\n\n\n\n
By William Watts
MarketWatch.com, New York
Wednesday, July 17, 2019<\/p>\n\n\n\n
Currency traders are contemplating the “I” word.<\/strong><\/p>\n\n\n\n While still seen as a longshot — Goldman\nSachs described it last week as a “low but rising risk” — a growing\nnumber of analysts are warning that President Donald Trump’s longstanding\nfrustration with the U.S. dollar’s relative strength versus major rivals could\neventually lead to U.S. government to intervene in the currency market in an\neffort to weaken the greenback. Here’s a guide to how intervention works and\nwhat it would mean for the market.<\/p>\n\n\n\n … What is intervention?<\/strong><\/p>\n\n\n\n Intervention occurs when a central bank buys\nor sells its own currency in an effort to influence the exchange rate.<\/p>\n\n\n\n A government might take action to halt a\nprecipitous slide or a sharp runup in its currency following a shock. It could\nalso act in concert with or on behalf of other countries in an effort to\nstabilize a particular currency. In fact, the last time the U.S. intervened in\nthe currency market was in March 2011, as part of a coordinated effort by the\nGroup of Seven nations to arrest a surge in the Japanese yen following a\ndevastating earthquake and tsunami.<\/p>\n\n\n\n Utilizing their massive reserves, central\nbanks can get their way, at least in the short term. A credible threat —\nexplicit or implied — to intervene around a certain level can often hold sway,\nparticularly if underlying fundamentals and other factors stand in the central\nbank’s favor.<\/p>\n\n\n\n But even central banks can be overwhelmed by\nthe market if fundamentals are out of line with goals. The Bank of England\npulled out all the stops on Black Wednesday in 1992 in a futile effort to keep\nthe British pound trading within the bands set by the European exchange rate\nmechanism, wasting billions of pounds of reserves.<\/p>\n\n\n\n … Why is intervention so rare?<\/strong><\/p>\n\n\n\n Intervention is hardly novel. In fact, as the\nGoldman Sachs chart below illustrates, until around the mid-1990s, it was\nrelatively common for the U.S. and other major developed countries to wade into\nmarkets in an effort to signal a desired exchange rate.<\/p>\n\n\n\n But unilateral intervention has long been out\nof favor, with the U.S. and other members of the Group of 20 in June\nreaffirming a previous commitment to refrain from competitive devaluations and\nto not target exchange rates for competitive purposes.<\/p>\n\n\n\n … How is it conducted?<\/strong><\/p>\n\n\n\n According to the New York Fed, the foreign\ncurrencies used to intervene by the U.S. usually come equally from Federal\nReserve holdings and the Treasury’s Exchange Stabilization Fund. Those holding\nconsist of euros and Japanese yen.<\/p>\n\n\n\n The New York Fed’s trading desk does the\nbuying and selling, often dealing simultaneously with several large interbank\ndealers in the spot market. The New York Fed, in a 2007 note, observed that it\nhistorically hasn’t engaged in the forward market or other derivative\ntransactions.<\/p>\n\n\n\n The process is also meant to be transparent,\nthe New York Fed says, with the U.S. Treasury secretary typically confirming\nthe move while the Fed is conducting the operation or shortly thereafter. After\nall, authorities are attempting to send market participants a message, so\nthere’s little incentive for them to cover their tracks.<\/p>\n\n\n\n … Who makes the call?<\/strong><\/p>\n\n\n\n While the Fed is responsible for executing\nany FX intervention, dollar policy is traditionally the purview of the Treasury\nDepartment. The Treasury’s foreign-exchange decisions, however, have typically\nbeen taken in consultation with the Federal Reserve System.<\/p>\n\n\n\n There’s much speculation around whether the\nFed would go along with a unilateral intervention effort. Powell, in\ncongressional testimony last week, repeated that the Treasury Department is\nresponsible for exchange rate policy. Goldman Sachs strategist Michael Cahill,\nnoting the remark, said it seems likely the Fed would probably defer to the\nTreasury and go along even if it does not agree.<\/p>\n\n\n\n If the Fed were to stick to the sidelines, it would cast the effectiveness of any intervention effort into doubt, analysts said. The Treasury’s Exchange Stabilization Fund has around just $22 billion in U.S. dollar — and another $51 billion in IMF Special Drawing Rights, or SDRs, that could be converted — that it could tap, The Fed can use its balance sheet, giving it vastly more firepower though the Treasury and the central bank typically would go 50\/50 in any intervention efforts.<\/p>\n\n\n\n
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\nLast week, Bloomberg News reported that Trump has asked aides to look for ways\nto weaken the dollar and asked about the currency in job interviews with the\ncandidates he’s selected for seats on the Federal Reserve’s board.<\/p>\n\n\n\n