Currency Intervention Makes Sense

On Tuesday, the trade-weighted value of the dollar was at its highest level since February, and its value has increased over 1% from its low set last Tuesday when Fed Chairman Ben Bernanke defended the dollar.

The gain is large when you consider that no gain of more than 2% has been seen over a week's time since March 2000. If ever there was a ripe time for currency intervention, it would be when the dollar has already advanced to a level that puts speculators closer to their pain thresholds. The worst time to intervene is when speculators have substantial profits that would be largely held intact after any intervention effort.

A rally in the dollar, if convincing, would put downward pressure on commodity prices and break the back of speculative excesses in that realm. Since this not a U.S. problem but a global one, it behooves policymakers to consider strong action. OPEC can add to the momentum with an increase in supply announced at its meeting with consumers on June 22 in Jeddah, Saudi Arabia.

By intervening when most speculators are already seeing their profits cut and when other speculators are experiencing losses from having sold at the lows, the effort has a greater chance of succeeding, with success being defined by the degree to which speculative fervor has been cut, not by the extent to which a particular move has been reversed. The point is to re-establish the idea of risk to speculators betting on one-way price movement.

Intervention efforts conducted by former Treasury Secretary Robert Rubin were conducted in this way. Current Treasury Secretary Henry Paulson has shown distaste for the idea of foreign-exchange intervention, as have other finance officials, yet it remains a potent symbolic and tactical tool to cut speculative fervor. It has worked at critical times in the past, most notably in 1985, 1995 and 2000, and intervention would establish parameters on a desired range for the dollar versus the euro, of between 0.80 and 1.60.

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Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of the revised investment classic, The Money Market, first published in 1978 by Marcia Stigum, and The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.

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