Firm stance: Yellen speaks at a news conference in Washington. She says the US has no appetite for concerted action and that the dollar’s overall strength is a natural result of different paces of monetary tightening. — Bloomberg
WASHINGTON: Japan and other countries facing the fallout from a soaring US dollar find little comfort in last week’s meetings of global finance officials, with no sign that joint intervention along the lines of the 1985 “Plaza Accord” is on the horizon.
With a strong push from Japan, finance leaders of the advanced economies of the Group of Seven (G7) included a phrase in a statement last Wednesday saying they would closely monitor “recent volatility” in markets.
But the warning, as well as Japanese Finance Minister Shunichi Suzuki’s threat of another yen-buying intervention, failed to prevent the currency from sliding to fresh 32-year lows against the US dollar as the week came to a close.
While Suzuki may have found allies grumbling over the fallout from the US central bank’s aggressive interest rate hike path, he conceded that no plan for a coordinated intervention was in the works.
“Many countries saw the need for vigilance against the spill-over effect of global monetary tightening and mentioned currency moves in that context. But there wasn’t any discussion on what coordinated steps could be taken,” Suzuki said in a news conference last Thursday after attending separate meetings of the G7 and G20 finance leaders in Washington.
US Treasury Secretary Janet Yellen made it clear that Washington had no appetite for concerted action, saying the US dollar’s overall strength was a “natural result of different paces of monetary tightening in the United States and other countries.”
“I’ve said on many occasions that I think a market-determined value for the US dollar is in America’s interest. And I continue to feel that way,” she said, when asked if she would consider a Plaza Accord 2.0 agreement.
In 1985, a destabilising surge in the US dollar prompted five countries – France, Japan, the United Kingdom, the United States and what was then West Germany – to band together to weaken the US currency and help reduce the US trade deficit.
Following the deal, named the Plaza Accord for the famed New York hotel where it was hammered out, the US dollar shed roughly 25% of its value over the ensuing 12 months.
With no current US interest in engineering that kind of deal, other countries have to find ways to mitigate the pain stemming from a strong US dollar, which has forced some emerging economies to hike interest rates to defend their currencies, even at the cost of slowing economic growth more than they want.
Emerging Asian nations have seen significant capital outflows this year that are comparable to previous stress episodes, heightening the need for policymakers to build liquidity buffers and take other steps to prepare for turbulence, said Sanjaya Panth, deputy director for the International Monetary Fund’s Asia and Pacific Department.
“The situation for Asian economies is very different from where they were 20 years ago as countries accumulated foreign reserves that make them more resilient to external shocks,” Panth told Reuters.
“At the same time, the rising debt levels, particularly in some economies in the regions, are a concern,” he said. “Some form of market stress cannot be ruled out.”
The Bank of Korea delivered its second-ever 50-basis-point interest rate hike last Wednesday and made clear the won’s 6.5% slide against the US dollar in September that drove up import costs, played a key role in the decision.
South Korea’s central bank governor Rhee Chang-yong said on Saturday he does not sense an interest among US officials to stem the US dollar’s strength through joint intervention.
But he said some kind of international cooperation on the US dollar may be needed “after a certain period.”
“I think a strong US dollar, especially for a substantial period, won’t be good for the US either, and actually I’m thinking about the long-term implications for the trade deficit, and maybe another global imbalance may happen,” he said. — Reuters
