Currency Controls Return as Central Banks Fight Gains
November 13th, 2007WARNING: This is not a recommendation to buy, sell or hold any financial instrument.
Hmm. With currency controls starting to figure into the action, I wonder where people will look to put their confetti investments… * wink *
Via: Bloomberg:
Central banks from Bogota to Mumbai are imposing foreign-exchange curbs to take control of their soaring currencies from traders dumping the dollar.
In Colombia, international investors buying stocks and bonds must leave a 40 percent deposit at Banco de la Republica for six months. The Reserve Bank of India created a bureaucratic thicket to curb speculation by foreign money managers. The Bank of Korea is investigating trading of currency forward contracts to limit gains in the won, now at a 10-year high.
Instead of using currency reserves or interest rates to influence foreign exchange markets, central banks and finance ministries are setting up obstacles to keep the falling dollar from threatening company profits and economic growth. The U.S. currency slumped 10 percent this year against its biggest trading partners, the steepest decline since 2003, while Treasury Secretary Henry Paulson has reiterated that the U.S. supports a “strong” dollar.
“Central banks are struggling to find new ways to intervene against their currencies and some of the proposals simply can’t work,” said Mirza Baig, an analyst in Singapore at Deutsche Bank AG, the world’s biggest currency trader. Some plans are “truly bizarre,” he wrote in a report.
The U.S. hasn’t attempted to stop the decline as the worst housing slump in 16 years forced the Federal Reserve to lower interest rates. The dollar has weakened 19 percent against the Canadian currency this year to a record 90.58 cents, and fell 18 percent versus Brazil’s real.
The euro strengthened 1.2 percent last week and reached an all-time high of $1.4752 on Nov. 9. It traded at $1.4573 today as of 1 p.m. in London. The yen rose 3.6 percent last week, and it touched 109.15 per dollar today, the highest since May 2006.
`More Violent Correction’
An index tracking the dollar against seven major trading partners dropped to 71.11 on Nov. 2, the lowest ever, a week after the Fed reduced its target rate for overnight loans between banks by a quarter-percentage point to an 18-month low of 4.5 percent.
Stephen Jen, head of currency research at Morgan Stanley in London, said on Nov. 2 that the dollar’s slide threatens to turn into a “more violent correction” that may require joint intervention by the U.S., European Union and Japan. The dollar will trade at $1.51 per euro by year-end, Jen said on Nov. 8.
The extent of the dollar’s slump reminds some traders of 1973, when former President Richard Nixon’s Treasury Secretary John Connally abandoned the Gold standard while the U.S. was in recession and inflation exceeded 10 percent. The dollar lost 40 percent against the yen in the next five years.
Since 2002, the U.S. currency has fallen 40 percent against the Canadian dollar, 33 percent versus the euro and weakened 24 percent compared with the British pound.
Research Credit: GP
