Report of US currency rescue plan
By Krishna Guha in Washington
August 28 2008 03:00
Financial Times
The US, Europe and Japan discussed the possibility of co-ordinated currency intervention to support the dollar during the Bear Stearns crisis in March, according to Japan's Nikkei online.
The US Treasury declined to comment on the report, which claimed the G7 had considered issuing an emergency communiqué during the weekend of March 15-16.
The Financial Times was unable independently to verify the Nikkei report. A G7 official said he understood there were some preparations for possible currency intervention during that period, but did not comment on any international talks.
As reported earlier in the FT, US and European policymakers have been concerned at various stages of the credit crisis about the possibility that, in an environment of persistent dollar weakness, a crisis at an individual financial institution could trigger a disorderly plunge in the US currency.
Such a disorderly decline would aggravate existing stress in other financial markets and could lead to foreign investors demanding a currency risk premium on all dollar assets, pushing up long-term US interest rates.
It would also increase the stain on economies such as the eurozone that have floating exchange rates, pushing up their own currencies to unsustainable levels.
This concern was acute at the time of the Bear Stearns crisis. G7 policymakers were in contact then and discussed potential spillovers in international markets.
However, in the event there was no emergency G7 statement. The G7 waited until their scheduled meeting on April 11 when they expressed concern about "sharp fluctuations in major currencies" and "their possible implications for economic and financial stability". They added: "We continue to monitor exchange markets closely, and co-operate as appropriate."
This statement marked a shift in international currency policy. Hank Paulson, US Treasury secretary, remained generally sceptical about currency intervention, but was careful not to rule it out in all circumstances.
Prior to March, US and European officials were at odds over currencies, with eurozone officials concerned about the decline of the dollar against the euro, but US officials broadly welcoming this as a prop to growth.
However, following the April 11 G7 meeting, US and European officials told the FT they were united in their support for a stronger dollar. Ben Bernanke, Federal Reserve chairman, joined Mr Paulson in talking in public about the US currency.
Policymakers believe a crisis at a financial institution is less likely to trigger a run on the dollar in an environment of general dollar strength. A stronger dollar also helps to curb oil and inflation, and support confidence in US assets.
Without another Bear Stearns-style crisis, currency intervention is unlikely, but if a similar crisis were to occur again and the dollar were to weaken precipitously, co-ordinated intervention is possible.
