Riva Froymovich reports:
Rapid and volatile trading in currency markets has led to questions on coordinated government intervention, perhaps next week. The answer: It shouldn’t happen, but the chance exists.
If the yen quickly shoots up again versus the dollar and euro — on Friday it was catapulted to a 13-year high against the dollar and nearly a six-and-a-half year high against the euro on the financial markets’ fleeting sense of stability — then monetary authorities may consider a smoothing operation to calm markets and weaken Japan’s currency.
“But, this is not a currency crisis,” said Geoffrey Yu, a foreign exchange strategist at UBS in London. “This is a liquidity crisis, a growth crisis, a confidence crisis. As such, probably the first step should not be to intervene to save currencies.”
The source of aggressive capital flows into the dollar and yen is emerging markets, and it is the emerging market central banks, flush with dollar reserves, who could take action to stem the market frenzy. Otherwise, the Bank of Japan’s hand is forced to call upon its peers to coordinate a foreign-exchange intervention, say analysts.
Emerging markets “need to act the same way the U.S. and European Union has acted,” said Yu. “That will address the root of the problem.” However, those governments’ assertiveness is limited by their experience. “They may need to be told what to do,” said Yu.
Ahead of the Asia Europe Meeting, which began Friday, Japan and other East Asian leaders agreed to establish an $80-billion joint fund aimed at fighting the global financial crisis. “This is really a watershed moment. Markets are moving too fast to digest this. We haven’t seen anything of this scale in Asia before,” Yu said.
