The buzz in the foreign exchange market is that central banks are planning to intervene to support the sagging euro. Such concerns helped lift the euro almost three cents off the record lows set earlier this month. Don't get snookered. While European officials may have taken the first step up the intervention ladder, they are still not prepared to actually intervene.
The fact that there has not been any intervention thus far is
evidence of the absence of will. At the
Group of Seven
meeting at the beginning of the year, European officials reportedly prevented a specific mention of the euro in the statement. Again, at the more recent April meeting, the communique contained no mention of the euro.
Nor did European officials show any greater cooperative spirit when the
Bank of Japan
was intervening heavily to slow the yen's rise. When the BOJ gave European officials money to intervene on the euro-yen cross early in the year, European officials tried to twist the operation for their own interests. Keen market observers report that they first bought the euro against the dollar, and then later bought the dollars and sold the yen. This appeared to sap the impact of the BOJ's intervention. No wonder Japan has been hesitant to intervene on the cross again.
No doubt, European economic and finance ministers discussed the euro's weakness in recent meetings. In recent days, several officials, especially France's new finance minister, have been brandishing the threat of central bank intervention to support the euro. This tactic has not yet had any measurable success.
The recent strengthening of the euro needs to be understood in the context of the more-than-2%-a-week slide, which has happened for the previous three weeks. The market was ripe for a bout of profit-taking and nearly any excuse would do. The bounce in the euro traced nearly a third of the losses suffered since the middle of last month -- no more than the minimum one would expect in a correction.
Wim Duisenberg, the president of the
European Central Bank
made it perfectly clear at last week's press conference that the case for intervention was not compelling. If the euro were to remain this weak, he said, it would add a few decimal points to inflation. European officials continue to forecast a decline in the pace of inflation as the year progresses. The ECB has consistently argued the weakness of the euro is not a function of monetary policy and that governments need to make more progress on structural reforms.
While some officials were talking tough, German Chancellor
continued to demonstrate a rather un-German nonchalance about the currency's depreciation. He told the
, parliament's lower house, that concerns over the weakness of the euro are "illusory." Schroeder is fond of talking about the positive consequences of the weak euro, especially for the export sector, which employs about a third of Germany's workers.
Some, however, seem to think intervention is inevitable and that intervention will take place after next week's
meeting and a May 18 vote on German tax reforms.
The bottom line is that the pain threshold for a critical mass of officials has not been breached yet. Not in Europe. Not in the world. Senior U.K. officials have made the point repeatedly that although sterling is overvalued, and they could intervene if they wanted to, they choose not to. That's partly on ideological grounds (currency prices should not be manipulated) and partly on pragmatic grounds (it would likely be ineffective).
U.S. Treasury Secretary
does not seem much warmer to intervention than his British counterparts. When asked about intervention, Summers often suggests the emphasis should be on structural reforms that strengthen growth more than foreign exchange prices. For its part, the dollar's strength is consistent with the Federal Reserve's tightening monetary policy. (It is true that the U.S. Treasury and the Fed can pursue conflicting policy goals. For example, the Treasury is buying back debt, which is pushing down interest rates even as the Fed raises them. But the point is that there is not a strong constituency in favor of intervening in the U.S.)
Ultimately, the ECB and Schroeder are right. Don't exaggerate the significance of the euro's weakness. European economic fundamentals are strong. The currency market is prone to overshoot. The euro is overshooting right now, but the overshoot has not reached crisis proportion.
In the near-term the euro can tick higher, but the market does not appear to be done probing for the official pain threshold. As spring turns into summer, however, things are likely to change. If $0.8830, the recent low in the euro, was not sufficiently disturbing, perhaps a move toward $0.8500 would generate attention. By then, the July G-7 economic summit in Japan will be in view and that would seem to be the most likely forum for a statement indicating that further euro declines are undesirable. And by that time, the market will also expect that the Fed's tightening is either finished or on hold ahead of the November election.
Marc Chandler is the chief currency strategist for Mellon Bank. At the time of publication, he held no positions in the currencies or instruments discussed in this column, although holdings can change at any time. While he cannot provide investment advice or recommendations, he invites you to comment on his column at