Financial Times admits currency market intervention via its own pages -- and invites more

9:18p ET Friday, May 9, 2008

Dear Friend of GATA and Gold:

In an editorial published yesterday and appended here, the Financial Times acknowledges that U.S. and European central bankers have just used the newspaper to talk up the dollar (as was criticized in this space -- http://www.gata.org/node/6284), and goes on to call for more "verbal intervention" by central banks in regard to China's and India's currencies.

No doubt the FT would like that "verbal intervention" also to be conducted in its own pages, even if the Chinese and Indians might want to choose other news organizations as their mouthpieces. It seems that in the FT's view the central banks should have the currency markets locked up, the FT should have the financial information market locked up, and any free markets should have to settle for other planets.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

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The Dollar Danger Is Not Over Yet

Financial Times, London
Thursday, May 8, 2008

http://www.ft.com/cms/s/0/41afd266-1d2a-11dd-82ae-000077b07658.html?ncli...

When a currency rises after government officials say that it should, you learn one thing: that the fundamentals were pushing it up anyway. It makes sense for senior US and European officials to talk up the dollar against the euro -- as they did this week in the Financial Times -- especially now that optimism about the US economy makes their arguments plausible. In the long run, however, the real risk of a dollar crisis is against the managed currencies of Asia and the Middle East.

Early March was a time of danger for the dollar. There were forecasts of a deep depression, liquidity fears around some of the mightiest banks on Wall Street, and the dollar's decline against the euro, already rapid, began to accelerate. That decline could have become self-sustaining if investors had begun to dump US assets, but the decisive rescue of Bear Stearns by the Federal Reserve shifted expectations about future US interest rates and restored confidence.

Through good judgment, as well as a little good luck, policymakers have so far avoided turning a credit crisis into a currency crisis. Without a run of fresh bad news on the US economy there is little reason for the dollar to fall further.

But while the dollar may now be stable, it is stable at well above $1.50 to the euro, a level that is below most estimates of its fundamental value. That probably suits the US -- a cheap but stable dollar should boost exports and encourage foreigners to invest -- even if it raises the bill for imported oil. The drag on exports is less comfortable for the eurozone, but while the US is an important trading partner, it takes less than 15 per cent of total eurozone exports.

But the trouble for both the US and Europe is not each other -- it is China, India, Middle Eastern oil producers, and a host of other countries that peg or manage their currencies against the dollar.

For the eurozone that means that currency overvaluation against the dollar puts pressure not just on exports to the US, but on exports to most of the rest of the world.

For the US it is both blessing and curse. Dollar falls would have been far more severe had Asian central banks stopped buying it, but as long as Asian currencies are held down it will be impossible to resolve global imbalances, and the risk of a dollar crash, one day, will grow. The pressure mounts steadily: with US interest rates down at 2 per cent, China is now losing vast sums of money on its foreign exchange reserves. Verbal intervention on the dollar and euro is welcome -- but it is time for verbal intervention on the rupee and renminbi as well.

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