Coordinated foreign exchange intervention to rein in the dollar is a matter of time

For the first time since the 1980s, widespread action by central banks to curb the relentless rise of the US dollar seems inevitable, according to Standard Bank’s Stephen Barrow.

Coordinated action by global policymakers is „just a matter of time” even if the US and some other countries have to „resist it,” Barrow, the bank’s head of G10 strategy, wrote in a note.

The call reflects growing concern about the impact of a strong dollar on the global economy. The dollar’s strength against a basket of currencies rose to its highest level in 20 years, although it eased slightly towards the end of the week. The euro has fallen to its lowest level since 2002, the yen has become the cheapest since 1998 (the Bank of Japan has spent $20 billion to intervene to support it), while the pound sterling has fallen to an all-time low.

Central banks have recently shown their determination to keep financial markets in order, with Japan trying to stop the yen from selling off, and then the Bank of England said it would buy long-term bonds to calm the chaotic securities market. In March 2020, policymakers worked together to boost US dollar liquidity through swap lines, as well as coordinate actions to weaken the yen in 2011 and strengthen the euro in 2000.

The last time central banks took concerted action to weaken the dollar was under the 1985 Plaza Accord. The key difference then was that the US had already broken the back of inflation, whereas now the outcome remains unclear.

According to Barclays Plc analysts Themistoklis Fiotakis and Cheryl Dong, markets may underestimate the inflationary impact of the dollar’s rise on the rest of the world.

“This is because the majority of global trade invoicing is done in dollars, and thus currency fluctuations against the dollar tend to have an immediate and significant effect,” they wrote in the note.

Barrow said FX intervention is more likely than global efforts in bond markets, citing the inflationary impact of bond purchases.

“Once the local bond market stabilizes, the BoE will wind down its emergency bailout plan and return to its bond sale plan,” he said. “Other central banks that have bought bonds in the past will not be able to spark a jump as long as inflation is high and rates are rising.”

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