SINGAPORE – Nations are being forced to go it alone in erecting defences against the relentless strength of the almighty US dollar, with no sign that governments are willing to act in concert.
Fuelled by hawkish Federal Reserve policy, US economic strength and investors in search of a haven from market swoons, the greenback is surging relentlessly against counterparts big and small by the most in decades. Japan has become the latest major country to step directly into the foreign exchange fray, joining nations from India to Chile that have been tapping their dollar stockpiles in the fight against the dollar.
While the problems in currency markets right now are in many ways reminiscent of the 1980s, the solutions are unlikely to be. Back then, the world’s economic superpowers agreed to tackle in unison the problem of persistent dollar strength, coming to an agreement in 1985 with the Plaza Accord. This time round, there is little sign that such a pact will be forthcoming as national economic interests diverge and the multi-decade shift towards greater global integration is thrown into reverse.
Coordination along the lines of a fresh Plaza Accord would need to include the US administration and there is “close to 0 per cent probability on the Treasury intervening right now to weaken the dollar”, said Mr Viraj Patel, a strategist at Vanda Research.
The action undertaken by Japan on Thursday was very much a solo affair, with an official from the United States Treasury confirming that it did not participate and the European Central Bank saying it was not involved with currency market interventions. A spokesman said the US Treasury understood the move but stopped short of endorsing it.
The depreciation of everything from the euro to the South Korean won is adding fuel to already burgeoning inflation pressures across the world, forcing many policymakers to dig deep into their toolkit.
China, the world’s second-biggest economy, is continuing to mount its own defence against the dollar with stronger-than-expected foreign exchange fixings. Central banks around much of the world – with Japan, some exception – are weighing in to boost interest rates as they contend with rising consumer prices and forex depreciation.
The Bloomberg dollar index, which measures the US currency against a basket of both emerging- and developed-market counterparts, hit fresh 20-year highs this week after the Fed confirmed its determination to lift borrowing costs in a bid to slay inflation.
This broad-based dollar strength, combined with the market fallout from the latest Bank of Japan decision, evidently proved too much for the Japanese government. Officials in Tokyo had previously talked only about foreign exchange market concerns, but amped up their fight on Thursday by acting directly to prop up the yen for the first time in 24 years. This is even as its central bank bucked the global trend towards monetary policy tightening and held the line on keeping official borrowing costs low.
Japan joins a growing group of countries that have taken direct action in foreign exchange markets, including Chile, Ghana, South Korea and India.
“It is an ‘every man for himself’ scenario right now because the world is much more fragmented today than in the 1980s,” said Mr George Boubouras, a three-decade markets veteran and head of research at hedge fund K2 Asset Management. “The chances of global coordination to weaken the dollar are close to zero – expect to see more reverse currency wars.”