Currency Leaders Still Playing With Fire

Thus far, the absence of clear, strongly worded protests to the pace or magnitude of moves in the foreign exchange market is understood by many participants as acquiescence at the very least, and possibly even sanction. While the euro was motoring ahead, at least two ECB officials indicated, without much apparent prompting, that more aggressive rate hikes might be needed. The comments seemed to reflect the lack of concern about the euro's appreciation.

Been There Done That

Political considerations had seemed to argue against a new G7 policy initiative.

The governments in Germany, Italy and Canada are new.

Japan's Koizumi is expected to step down in the fall and a new head of the Finance Ministry is likely.

Many people suspect that British Prime Minister Tony Blair may step down before the end of the year as well.

The French government is unpopular, and there is talk that President Chirac may reshuffle his government to bolster the party's chances for next year's election.

And in the U.S., there continues to be speculation that Treasury Secretary Snow may be replaced shortly. (One of the people rumored to be a likely candidate is Harvard's Martin Feldstein.)

Yet rather than prevent a new initiative, the political weakness of the individual G7 countries has led to a reversion to an earlier and politically expedient strategy. In lieu of the political will for structural reforms, the countries have opted to let the currency market bear the adjustment. In effect, the U.S. had abandoned the strong-dollar policy, first articulated by Robert Rubin to signal a break from the devaluationist thrust of his predecessor Lloyd Bentsen.

Many observers have portrayed the G7/IMF stance as multilateral. This is deceiving.

In recent weeks there have been two other meetings of monetary officials (ASEAN+3 in early May and the Asian and European finance ministers met in late April), and the statements that were issued did not reflect the sense of urgency of the G7/IMF meeting communique. The key difference was the absence of the U.S. Also, remember that after the 1997-1998 Asian financial crisis, when the IMF essentially pushed for the implementations of the Washington Consensus, it is hardly perceived as an independent actor.

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At the time of publication, Chandler was long yen vs. USD and long Swiss francs vs. euros, although holdings can change at any time.

Marc Chandler has been covering the global capital markets in one fashion or another for nearly 20 years, working at economic consulting firms and global investment banks. Currently, he is the chief foreign exchange strategist at Brown Brothers Harriman. Recently, Chandler was the chief currency strategist for HSBC Bank USA. He is a prolific writer and speaker and appears regularly on CNBC. In addition to being quoted in the financial press, Chandler is often a guest writer for the Financial Times. He also teaches at New York University, where he is an associate professor in the School of Continuing and Professional Studies. While Chandler cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.