Oh boy. Those who believe the markets are manipulated are going to have a field day with this one...
On the final day of the quarter and half, with
providing the latest evidence of U.S. corporate corruption, and after George Soros told
The Wall Street Journal
the dollar could fall by one-third, the
and European Central Bank intervened this morning to support the dollar and weaken the yen.
The intervention was coordinated by, and done on behalf of, the Bank of Japan. Before Friday, the BOJ had intervened on its own a half-dozen times since mid-May to sell yen and buy dollars.
"Today's coordinated central bank intervention reflects the increased preoccupation by global authorities with the fall in the world's reserve currency," commented Ashraf Laidi, chief currency analyst at MG Financial Group. Laidi noted the Fed had observed "modest recent declines in the foreign exchange value of the dollar," according to the
minutes of the May 7 FOMC meeting released Thursday.
At that time, the U.S. Dollar Index was off 5% from its January high of 120.17. "Thus, if the Fed were concerned when the dollar was off 5%, it is definitely speaking its mind today," Laidi quipped, as the dollar index was down by 12.5% from its January highs heading into Friday.
Of late the dollar index was lately down 0.14 to 106.76 vs. its earlier high of 107.30 and low of 105.97, as the greenback was coming off its postintervention highs.
The dollar was reeling again in overnight trading and early Friday morning amid more concerns about corporate malfeasance and in consternation that the greenback was unable to rally Thursday as stocks recovered. The dollar fell as low as 118.35 yen while the euro traded as high as 99.90, its highest since Feb. 24, 2000. Meanwhile, the Swiss franc hit its highest level since Oct. 1999, pound sterling reached a near two-year high and the Canadian dollar was also rallying sharply vs. the greenback.
Then around 10 a.m. EDT came word of the joint intervention, which abruptly changed the equation for foreign exchange traders.
"We had previously dismissed the Bank of Japan intervention efforts as ineffective, largely because they were acting without the support of the U.S. or Europe," said Tom Arnold, a partner at Plimsoll Capital, on
. "If that has changed, then so shall our analysis."
Joint intervention will have an "exaggerated impact" on currency trading Friday because it's month- and quarter-end, and because the market is "clearly positioned long yen" and short dollars, Arnold continued. "And when profits are at stake, currency traders can be very shortsighted."
Indeed, short-term considerations sent currency players scrambling to cover long yen/short dollar positions this morning. At its heights, the dollar was trading at 120.36 yen, although was more recently at 119.75 yen while the euro was at 99 cents, also up from its postintervention low.
For the record,
reported the U.S. Treasury, Japan's Ministry of Finance, and Bank of England declined to comment on the reported intervention. However, an ECB official confirmed it was involved and Japan's Vice Finance Minister Haruhiko Kuroda told the newswire: "We are intervening in the market. The ECB and Fed are operating on behalf of the BOJ as well."
The timing of the intervention was "impressive," according to David Greenwald, who recently departed as bead of U.S. foreign exchange trading at Bank of America to help found Scalene Partners, a Westport, Conn.-based hedge fund focused on currency trading.
"This was a good one because they took advance of the fact the market had become comfortable with the BOJ intervening" on its own, he said. "People were surprised to see the ECB buying euro
and selling yen. There was good shock value," although the shock seems to have worn off pretty quickly.
On the home front, Friday's Fed buying of dollars and selling yen followed what Greenwald called "mixed signals" from the Bush administration. Alternatively (and sometimes simultaneously), U.S. officials have said the so-called strong dollar policy remains intact but that the market will set currency rates.
By acting on behalf of the BOJ rather than operating independently, the administration is "getting its cake and eating it too," he continued. "For today the market was surprised enough so it's having some follow-through effect."
However, the currency trader largely agrees with George Soros' contention that the greenback remains overvalued, and forecast the greenback's downward trend will soon re-emerge, with the euro reaching parity and the dollar falling below its post-Sept. 11 lows of 115.90 yen.
"Today's price action is indicative the market was oversold and you're seeing a relief rally" in the dollar, Greenwald said. "Foreign exchange markets always have aggressive moves the other way within the trend
weak-dollar trend is there and gaining speed."
In recent weeks, I've written about
the potential for coordinated central bank intervention to support the dollar, and suggested such developments would likely trigger
countertrend moves within ongoing longer-term bear markets for U.S. stocks, bonds and the dollar, and bull markets for gold and inflation.
Of late, the price of gold was down 1.6% to $314.50 per ounce and the Philadelphia Stock Exchange Gold & Silver Index was down 2.4%. The price of the benchmark 10-year note was down 6/32 to 100 7/32, its yield rising to 4.85%.
Short-term gyrations notwithstanding (primarily the bond market's recent rally), that view is only enhanced by the government's tacit admission today as to just how serious the dollar's drop had become. The history of interventions has shown central banks can stem the tide of a currency's fall, but ultimately can't stop it.
Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
Aaron L. Task.