Defending Dollar May Be A Losing Proposition Federal Intervention Proves To Have Little Effect In Global Currency Trade Winds
The United States may be an economic superpower, but it’s more like Gulliver at the mercy of the Lilliputians in the global foreign exchange market.
That’s an oversimplification, but it helps illustrate how Washington has little or no control over the weakening of the dollar, which has fallen to record lows against the Japanese yen and German mark in recent weeks.
The Federal Reserve, the U.S. central bank, sought to halt the dollar’s slide Monday at the Treasury Department’s request by swooping into the market a number of times, selling yen and marks for dollars.
But the effects of that effort, known as an intervention, largely faded within hours. Rather than viewing the move as the command of a restive giant, the world’s money traders saw it as an easy opportunity to, well, make a buck.
“Repeated Federal Reserve intervention did little to stem the tide of sell orders against the dollar,” said a market bulletin from Technical Data, a Boston-based financial advisory firm.
Money traders bought dollars as the Fed’s purchases pushed the currency up, then sold them to lock in a quick profit. By the end of trading in New York, the dollar fetched 86.13 yen, cheaper than its 86.55-yen exchange rate Friday, and 1.3725 marks, cheaper than its 1.3735-mark exchange rate Friday.
“To be honest, the effect of the intervention was very limited,” said Jack Griffin, vice president of foreign exchange at the New York office of Japan’s Fuji Bank.
The Fed’s purchase of an estimated $1 billion to $2 billion of dollars Monday, while big by intervention standards, is a blip in a market where roughly $1 trillion worth of money is traded daily, a majority of it in dollars.
In the view of many economists and currency traders, the dynamics of the dollar’s demise makes any intervention to defend the currency a losing proposition, even for an economic giant like the United States.
The dollar’s depreciation is partly rooted in the cumulative effects of U.S. borrowing abroad to finance the country’s irrepressible trade and budget deficits, which have put enormous sums of dollars in foreign hands.
When other central banks and large overseas investors sell these dollars for their local species of money, it creates what amounts to a dollar glut.
“What has brought the dollar to these low levels are some structural adjustments that are pretty profound,” said David Gilmore, a partner at Foreign Exchange Analytics, an investment advisory firm in New York. “The world is awash in dollars.”
Another force working against the dollar is interest rates - the return on investment for parking your money somewhere.
The prevailing view among money traders is that U.S. interest rates, which have been rising for more than a year, aren’t likely to rise much further and could fall because the American economy is slowing down. This reduces the allure of buying dollar-denominated investments, weakening demand for dollars.
On the other hand, interest rates in Japan and Germany, the world’s other two key economies, are relatively high and seen as unlikely to fall. That makes investments denominated in yen and marks more preferable to those denominated in dollars.
The economic crisis in Mexico has worsened the U.S. currency’s prognosis, some currency brokers say. As Mexico’s purchases of American goods and services drops, the trade deficit will widen, intensifying selling pressure on the dollar.
The beginnings of this trend were seen less than two weeks ago, when the Commerce Department reported a record monthly trade deficit for January. A key cause was the diminished ability of Mexico to buy U.S. products.
Some currency traders said the Fed’s dollar-buying effort Monday was a calculated attempt to smooth the currency’s downhill ride and discourage a rampant sell-off that feeds on itself. They reasoned that Treasury Secretary Robert Rubin, a former Goldman Sachs executive, is intimate with the nuances of currency trading and knew what he was doing.