Monday, November 08, 2004

On Friday, your's truly asked "How long until the Europeans get sick and tired of nobody buying their exports?" Apparently the answer is: "three days".
The U.S. dollar clawed its way up from record lows against the euro Monday, finding some footing after the chief of the European Central Bank spoke out against the swiftness of the euro's recent advance.

ECB President Jean-Claude Trichet, speaking after a meeting with central bankers in Basel, Switzerland, said that the euro's latest gains on the dollar were "brutal" and "not welcome." . . .

Analysts at Action Economics deemed Trichet's comments a form of "verbal intervention" that had the effect of buffering the dollar in the short term.

The dollar had earlier hit a new all-time low of $1.2985 against Europe's shared currency. In morning U.S. trading, the euro was trading at $1.2922, or 0.3 percent lower than in Friday's late U.S. trading.

The likelihood of actual intervention, or government selling of euros on the open foreign-exchange market, seemed much less likely.
On Saturday, Brad Setser thought long and hard (and on the weekend no less!) about how long the Bank of Japan will be able to sit and watch the dollar decline, finishing up with some perceptive comments regarding the Europeans:
Second, there is some noise -- at least from Morgan Stanley analysts like Eric Chaney -- that the ECB may conclude that it should intervene to protect Europe from the dollar's weaknesses during Bush's second term. While I don't agree with the Bretton Woods two argument that a new system of fixed exchange rates will make the US current accout deficit sustainable for twenty years, I should note that the proponents of Bretton Woods two long have been arguing that Europe would eventually have to join Asia in pegging to the dollar. The Bretton Woods two system of fixed exchange rates will expand before it collapses ...

European intervention would be a way of spreading the "burden" of supporting US consumption growth that exceeds US income growth and the US budget deficits beyond Asia. I am not sure Europe wants that role. Jacques Chirac hardly wants to bailout George W. Bush. Japan may feel like it has no choice. I suspect there is a bit of a game of chicken now going on in the foreign exchange market. If central banks don't step in and provide some of the financing the US needs, then something will have to give -- since private investors don't seem willing to step in and buy US dollar assets at current US interest rates and current US exchange rates.
I like the metaphor of a game of chicken between the Bank of Japan and the European Central Bank. According to CBS Marketwatch,
Ogino said a block of dollar-yen options with strikes around 105 yen expire Friday and next week, so defensive selling of the yen is likely to support the dollar in the short run.

"But if the dollar suddenly drops to 104 yen, Japanese authorities would likely step in," he said.
I suspect the BOJ will swerve long before the ECB is forced to materially support the dollar. We have to watch for action from Beijing, too. But nonetheless these next two weeks are going to be a wild ride for the greenback.

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