"Since our last meeting, there have been at times sharp fluctuations in major currencies, and we are concerned about their possible implications for economic and financial stability," says the statement from this weekend’s G7 meeting.
Photo:michaeln3, Creative Commons, Flickr
It was the first time since the Prague meeting of 2000 that the G7 have united to voice explicit concern about moves in major currencies. The weak dollar is causing a lot of pain for many nations, and global inflation can spiral out of control if the world’s reserve currency continues to slide lower. Should markets get ready for coordinated intervention to save the greenback?
I’ve had one foot in the grave for the past 48 hours, caught up in a NyQuil/Theraflu haze, and I haven’t followed any market action since Sunday evening. That being said, I should probably not be writing about financial markets. But certain chemicals have been known to fuel creativity, and creativity is something central bankers desperately need in this time of impotent monetary policy.
I wasn’t very surprised to see the Euro trading at record highs once I got back to my trading desk a few hours ago. As I pointed out in a previous blog, the G7’s bark is worse than its bite, and very few observers really think that the G7 can influence currency movements. The forex market is massive, transacting well over a trillion dollars a day, and any money central banks throw at the market can quickly be absorbed.
Here’s a Nyquil-inspired message to the G7: Pick the battles you can win! Instead of diving into the currency markets, why not support the battered dollar by buying U.S. stocks? U.S. stock valuations may look attractive, but foreigners won’t buy because the falling dollar turns all (cheap) U.S. assets into falling knives.
On the other hand, foreigners will rush to buy U.S. stocks if they know that the G7 is there to protect the downside. Increased foreign demand for U.S. stocks will increase the dollar’s foreign demand, and could guarantee a recovery.
This might sound crazy, but it’s been done before. The Hong Kong government controversially used the exchange fund to acquire an estimated $120 billion worth of blue-chip shares in a two-week market intervention, beginning August 12, 1998 with the aim of punishing and deterring currency speculators trying to attack the Hong Kong dollar peg. It worked then, so why shouldn’t it work now?
As is usually the case, there are side-effects associated with all things Nyquil. In our case, a rising stock market may lower corporate America’s cost of raising capital. U.S. companies can bypass the trouble in credit markets and instead generate funds by issuing equity on the stock market. Improved access to capital will improve corporate confidence, and might guarantee a shallow recession.
Am I making sense, or is this the Nyquil speaking?
Disclaimer: I do not own U.S. stocks, but will buy aggressively if I feel the dollar is going to recover. I believe that the likelihood of intervention remains very low if the decline of the dollar is orderly.
Photo:Rakka, Creative Commons, Flickr