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The dollar is depreciating in eye-catching and headline-grabbing fashion. The Japanese authorities are signaling that they are prepared to intervene. The G-7 (remember them?1) has the established role of coordinated intervention in major currency markets when things get out of hand. So where are they now and when will they come in?
The answer is: You may have to wait a long time. This round of dollar weakening is the direct result of easing monetary policy in the United States. The Fed doesn't usually talk about the dollar (leaving this to the Treasury, which has a tradition of obfuscation on the issue), but dollar depreciation is fully consistent with (1) wanting to prevent deflation, and (2) hoping to stimulate growth through exports. The spin masters would probably also say that actions to restore confidence in the global financial system are reducing demand for dollars as a safe haven, and this is reflected in currency markets.
You may or may not agree with this logic, but from a US perspective there can be little interest in immediate intervention. The Japanese are obviously unhappy when their exchange rate appreciates beyond 95 yen to the dollar, but their G-7 partners are pretty unsympathetic at that level—Japan has been running a massive current account surplus (hence its reserves of over $1 trillion) and has long been in line for some appreciation. At 85 yen to the dollar, things would start to get more animated, and almost everyone would support intervention at 80.
The dollar-euro thinking is even more interesting. The United States (and my former colleagues at the IMF) is obviously pressing for a big fiscal stimulus in Europe. But key European governments are just as obviously demonstrating the desire to free ride, i.e., you put through a hefty fiscal package of $850 billion and I'll get back to growth through selling you more BMWs. While the United States will of course observe every diplomatic nicety in this situation, privately the outgoing and incoming administrations must be enjoying the fact that dollar depreciation puts the European Central Bank—and particularly the Germans' export-driven economy—very much on the spot.
Personally, I think the euro-dollar rate would have to move much further, probably close to 1.6 dollars per euro, for the intervention conversation to get serious. Of course, if markets become "disorderly" so that prices jump around in an unusual way, there are always grounds for intervening. But, on the other hand, in this situation you can rationalize almost any short-term exchange rate movement as the market adjusting to new fundamentals. And you can look very pointedly at the European Central Bank when you say this.
This article was also posted on Mr. Johnson's blog, Baseline Scenario.
1.The G7 (also known as the G-7 or Group of Seven) is the meeting of the finance ministers from a group of seven industrialized nations: Canada, France, Germany, Italy, Japan, United Kingdom and the United States.
