Analysis-G7 fails to reach an intervention agreement to ease the pain of the soaring dollar

By Leika Kihara

WASHINGTON (Reuters) – Japan and other countries dealing with fallout from the soaring U.S. dollar found little solace in last week’s meetings of global finance officials, with no signs that a joint intervention along the lines of the 1985 “Plaza Accord” was on the horizon.

With a strong push from Japan, financial leaders from the advanced economies of the Group of Seven included a sentence in a statement Wednesday saying they will closely monitor “recent volatility” in markets.

But the warning, along with Japanese Finance Minister Shunichi Suzuki’s threat of further yen-buying intervention, did not prevent the currency from sliding to new 32-year lows against the dollar at the end. of the week.

While Suzuki may have found allies who complain about the fallout from the U.S. central bank’s aggressive interest rate hike trajectory, he conceded that no coordinated intervention plan was in the works.

“Many countries saw the need to be vigilant in the face of the ripple effect of global monetary tightening and mentioned currency movements in this context. But there was no discussion of coordinated actions that could be taken,” Suzuki told a news conference on Thursday after attending separate meetings of G7 and G20 finance leaders in Washington.

US Treasury Secretary Janet Yellen made it clear that Washington has no appetite for concerted action, saying the dollar’s overall strength was the “natural result of different paces of monetary tightening in the United States and other countries.” other countries”.

“I’ve said many times that I think a market-determined value of the dollar is in America’s best interests. And I continue to think so,” she said Tuesday, when asked. asked if she would consider a Plaza Accord 2.0 deal.

NO YEN SUPPORT

In 1985, a destabilizing surge in the dollar prompted five countries—France, Japan, the United Kingdom, the United States, and what was then West Germany—to band together to weaken the U.S. currency. and help reduce the US trade deficit. Following the deal, dubbed the Plaza Accord for the famous New York hotel where it was struck, the dollar lost about 25% of its value over the next 12 months.

With no current U.S. interest in engineering this type of deal, other countries must find ways to lessen the pain resulting from a strong dollar, which has forced some emerging economies to raise interest rates to defend their currencies, even at the cost of slowing economic growth. more than they want.

Emerging Asia has seen large capital outflows this year on par with previous crisis episodes, reinforcing the need for policymakers to build up cash reserves and take other measures to prepare for turbulence, said Sanjaya Panth, deputy director for Asia and the Pacific at the International Monetary Fund. Department.

“The situation of Asian economies is very different from what it was 20 years ago,” with countries having accumulated foreign exchange reserves that make them more resilient to external shocks, Panth told Reuters on Thursday on the sidelines of annual meetings. of the IMF and the World Bank in Washington.

“At the same time, rising debt levels, particularly in some economies in the regions, are of concern,” he said. “A certain form of tension in the market cannot be ruled out.”

The Bank of Korea announced its second 50 basis point interest rate hike on Wednesday and made clear that the 6.5% fall in the won against the dollar in September, which pushed up import costs , played a key role in the decision.

South Korea’s Central Bank Governor Rhee Chang-yong said on Saturday he saw no interest among U.S. officials in stemming dollar strength through joint intervention.

But he said some sort of international dollar cooperation might be needed “after a certain period of time.”

“I think a dollar that’s too strong, especially for a substantial period of time, won’t be good for the United States either, and in fact I’m thinking of the long-term implication for the trade deficit, and maybe that ‘another global imbalance could occur.,’ he said.

In Japan, the onus is on the government to deal with a further fall in the yen, caused in part by the policy divergence between the Federal Reserve’s determination to raise U.S. interest rates and the Bank of Japan’s resolve to maintain borrowing costs at an extremely low level.

At the press conference where Suzuki issued his warning of the yen’s sharp fall, BOJ Governor Haruhiko Kuroda again ruled out the possibility of a rate hike.

The dollar jumped about 1% to hit a fresh 32-year high of 148.86 yen on Friday, testing the authorities’ resolve to fight the Japanese currency’s relentless slide. The dollar/yen is now up about 2% from levels where Japan stepped in on September 22 to buy yen for the first time since 1998.

Japanese policymakers said they would not seek to defend a certain level of the yen and would instead focus on smoothing volatility.

Masato Kanda, the country’s top monetary diplomat, told reporters on Friday that authorities stood ready to take “decisive action at any time” if the yen’s excessively volatile movements continued.

However, even moderating the yen’s sharp moves could be a challenge, as Kuroda’s assurance that the BOJ will keep interest rates in negative territory gives investors the green light to continue dumping the currency.

“It is impossible to reverse the yen’s bearish trend with solo intervention,” said Daisaku Ueno, chief forex strategist at Mitsubishi UFJ Morgan Stanley Securities.

“Once the yen drops below 150 to the dollar, it’s hard to predict where its depreciation might end as there is no technical chart support until around 160,” he said.

(Reporting by Leika Kihara; Additional reporting by Daniel Burns in Washington and Tetsushi Kajimoto in Tokyo; Editing by Paul Simao)

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