Chandler: Don't Expect Dollar Intervention

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Now that the Federal Reserve has indicated that that its risk assessment has changed -- less concerned about the risks of a significant contraction in the economy and more concerned about inflation and inflation expectations -- there has been some renewed speculation that the G8 meeting could be the forum where intervention in the currency market is more likely. The goal of such intervention would ostensibly be to prick the bubble in commodities.

The risk of this happening is minimal. First, the G8 meeting is not a proper venue for this, without central bankers at the meeting. Second, the link between commodity prices and the dollar is far from clear. If the goal is, for example, to lower the price of oil, then intervening in the foreign-exchange market seems too indirect and does not have high odds of success.

Look at the euro, which is where the interventionists are suggesting that the operation take place. It has been trading broadly sideways between $1.53 and $1.60, about a 4.5% range, since mid-March. In the past couple of days, the euro has fallen by 2.5%. And oil? Using the July futures contract as our proxy, the price of crude has risen nearly 40% while the euro has been range-bound.

At yesterday's low, the euro moved within about 0.5% of its 100-day moving average. Meanwhile, July crude is trading about 22% above its 200-day moving average.

Better Ways to Lower Oil

There are more direct ways to try to influence the price of oil. For example, after Hurricane Katrina, the International Energy Agency, in cooperation with the E.U., provided oil (about 60 million barrels) and products to the market. Another step that would be more direct than intervention in the foreign-exchange market would be to lower the speed limit for autos and trucks.

What about the grains? The price of foodstuffs has skyrocketed. Surely a strong dollar would reverse this, right? That seems to be largely wishful thinking. As we have argued previously, while there are many factors influencing the price of grains, the decline in the dollar seems marginal.