US intervention for the dollar | Forex Factory

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US intervention for the dollar

  • #1
  • First Post: Apr 18, 2007 11:01am Apr 18, 2007 11:01am
Hi guys, I need some help with something. I am not sure what the US equiv is of a central bank (someone please enlighten me), but sometimes won't they intervene when a dollar is getting to strong or too weak? What I also wanted to know is, when the powers that be are going to intervene, is there an official statement?

I was just looking at the pound and on my charts, the last time the GBP was this high was is 1991 and 1992. The GBP didnt stay at $2+ for long and shot down like a meteor. I was curious if you think this will happen again and what do I look for.

thanks guys.
  • #2
  • Apr 18, 2007 11:08am Apr 18, 2007 11:08am
Quoting vder
Hi guys, I need some help with something. I am not sure what the US equiv is of a central bank (someone please enlighten me), but sometimes won't they intervene when a dollar is getting to strong or too weak? What I also wanted to know is, when the powers that be are going to intervene, is there an official statement?

I was just looking at the pound and on my charts, the last time the GBP was this high was is 1991 and 1992. The GBP didnt stay at $2+ for long and shot down like a meteor. I was curious if you think this will happen again and what do I look for.

thanks guys.
the sharp drop that you see in the GBP/USD back in the 90s? Wat you see is sterling getting kicked out of the European Rate Mechanism (and George Soros making US$ 1billion in 2 days;-) ) Sterling had entered the ERM overvalued and the market knew it , BOE tried to fight the market back but eventually gave up and got out of the system, by then of course England was driven into a depression caused by its expensive currency). Sterling then was free-floating currency again.
  • #3
  • Apr 18, 2007 11:25am Apr 18, 2007 11:25am
Ahah, black wednesday...thanks for that. However, what was the cause for the huge drop in 1991? The GBP went downward hard as well.

Also, if someone chooses to intervene, will it be announced?

thanks.
  • #4
  • Edited 11:33am Apr 18, 2007 11:31am | Edited 11:33am
China's vast and rapidly growing foreign exchange reserves accumulate because China does not sell the surplus US dollars that it receives from its trade surplus with the United States into foreign exchange markets, but buys US debt with them instead. Under normal circumstances China would have sold its surplus US and not accumulated such a vast foreign exchange reserve but the US trade deficit is so large that if China, Japan and Europe were to sell their trade dollars into our market the dollar would collapse.

Last year the OECD said that the dollar had to fall by 35% to 50% in order to balance the US current account gap.

China does not have to sell any of its existing dollar reserves to precipitate a decline in the dollar - all it has to do is stop accumulating dollars. The current US trade deficit with that country alone is running over $20 billion per month, and that is not an insignificant amount. If China stopped accumulating foreign reserves those dollars would be sold.

Other Asian countries that helped prop up the dollar by accumulating foreign reserves may follow China and start selling their surplus trade dollars as well.

The ramifications are that there will subsequently be less demand for US Treasuries and agency debt. That will push US interest rates higher regardless of what the Fed says, and higher interest rates will be detrimental to US economic growth and US equities.

One would expect that higher US interest rates would be positive for the dollar, but with surplus trade dollars hitting foreign exchange markets we can expect to see the dollar fall in tandem with rising interest rates. And then we'll make bundles. The dollar will be in the toilet this year. IMO.
Do not focus on making money; focus on protecting what you have.
  • #5
  • Apr 18, 2007 11:37am Apr 18, 2007 11:37am
I'm hard-pressed to believe the Fed would intervene...ever. The weakness of the dollar is justified considering the position the US economy is in compared to the rest of the world. Inflation is moderating, and interest rates should come down to try and prevent a horrible recession. I think recession is inevitable, but I think it should be tamer and shorter than the previous period.

On the global scale, inflation should be moderating soon enough. I figure both the ECB and the BoE will raise rates 1 or 2 more times before inflation moderates. Then you'll get a hold period of a few months to a year. At that point, the US recession should be going on, and the rest of the world will probably slowly be dragged down forcing their rates to come down.

When that happens, my guess is that the US interest rates will be moderately low (but nothing near as it was last time), and the US will then be forced to tighten rates as we climb out of recession while the global rates are coming back down.

The point is, we should see weakening in the US currency as the fed eases rates and the rest of the world is raising rates...however, that period should flip once the US starts to climb out of the next recession. These things go in cycles, and the currency rides the waves.

Quoting vder
Ahah, black wednesday...thanks for that. However, what was the cause for the huge drop in 1991? The GBP went downward hard as well.

Also, if someone chooses to intervene, will it be announced?

thanks.
  • #6
  • Apr 18, 2007 11:39am Apr 18, 2007 11:39am
Definitely agreed. The China factor will help to tank the dollar against most currencies. The question is, which currency will benefit the most.

Quoting Why Oh Why
China's vast and rapidly growing foreign exchange reserves accumulate because China does not sell the surplus US dollars that it receives from its trade surplus with the United States into foreign exchange markets, but buys US debt with them instead. Under normal circumstances China would have sold its surplus US and not accumulated such a vast foreign exchange reserve but the US trade deficit is so large that if China, Japan and Europe were to sell their trade dollars into our market the dollar would collapse.

Last year the OECD said that the dollar had to fall by 35% to 50% in order to balance the US current account gap.

China does not have to sell any of its existing dollar reserves to precipitate a decline in the dollar - all it has to do is stop accumulating dollars. The current US trade deficit with that country alone is running over $20 billion per month, and that is not an insignificant amount. If China stopped accumulating foreign reserves those dollars would be sold.

Other Asian countries that helped prop up the dollar by accumulating foreign reserves may follow China and start selling their surplus trade dollars as well.

The ramifications are that there will subsequently be less demand for US Treasuries and agency debt. That will push US interest rates higher regardless of what the Fed says, and higher interest rates will be detrimental to US economic growth and US equities.

One would expect that higher US interest rates would be positive for the dollar, but with surplus trade dollars hitting foreign exchange markets we can expect to see the dollar fall in tandem with rising interest rates. And then we'll make bundles. The dollar will be in the toilet this year. IMO.
  • #7
  • Apr 18, 2007 12:29pm Apr 18, 2007 12:29pm
thanks for the input guys, I will be continuing to monitor the currencies.
  • #8
  • Apr 18, 2007 2:05pm Apr 18, 2007 2:05pm
Quoting Why Oh Why
China's vast and rapidly growing foreign exchange reserves accumulate because China does not sell the surplus US dollars that it receives from its trade surplus with the United States into foreign exchange markets, but buys US debt with them instead. Under normal circumstances China would have sold its surplus US and not accumulated such a vast foreign exchange reserve but the US trade deficit is so large that if China, Japan and Europe were to sell their trade dollars into our market the dollar would collapse.

Last year the OECD said that the dollar had to fall by 35% to 50% in order to balance the US current account gap.

China does not have to sell any of its existing dollar reserves to precipitate a decline in the dollar - all it has to do is stop accumulating dollars. The current US trade deficit with that country alone is running over $20 billion per month, and that is not an insignificant amount. If China stopped accumulating foreign reserves those dollars would be sold.

Other Asian countries that helped prop up the dollar by accumulating foreign reserves may follow China and start selling their surplus trade dollars as well.

The ramifications are that there will subsequently be less demand for US Treasuries and agency debt. That will push US interest rates higher regardless of what the Fed says, and higher interest rates will be detrimental to US economic growth and US equities.

One would expect that higher US interest rates would be positive for the dollar, but with surplus trade dollars hitting foreign exchange markets we can expect to see the dollar fall in tandem with rising interest rates. And then we'll make bundles. The dollar will be in the toilet this year. IMO.
What you seem to be saying is the exact opposite of what China and the other emerging markets would want to do. They will never stop accumulating $'s, because that would entail the stoppage of trade.

The last thing that China or any of the emerging nation markets want to do is anything which would cause the $ to decline-the weaker their currencies are, the more it's to their advantage (because they are so dependent on trade).
Emerging market economies manipulate their currencies in order to accumulate $'s and drive current ccount imbalances in their favor. The reason they are so dependent on exports, is because their own potential "consumers" are for the most part poor. You can think of it this way: When an emerging market boosts its exports, they're esentially importing consumers.
  • #9
  • Edited 2:49pm Apr 18, 2007 2:15pm | Edited 2:49pm
Here is a little something to add to your China text. We were in Eur the end of March and caught a news report that China, sitting on 1 trillion in cash, in a bank and not being happy with their returns, is getting ready to invest in the US, report said that a firm has been selected and was looking at places to put the cash, wanting a better return. How much truth ??? Take it for what it is worth Just a news report
  • #10
  • Apr 18, 2007 2:56pm Apr 18, 2007 2:56pm
Quoting NewstraderFX
The reason they are so dependent on exports, is because their own potential "consumers" are for the most part poor. You can think of it this way: When an emerging market boosts its exports, they're esentially importing consumers.
I think you've put it very well. Do you mind me using your quote in my Economics class?
  • #11
  • Apr 18, 2007 3:24pm Apr 18, 2007 3:24pm
Quoting vder
Hi guys, I need some help with something. I am not sure what the US equiv is of a central bank
FED
  • #12
  • Apr 18, 2007 3:53pm Apr 18, 2007 3:53pm
Quoting Why Oh Why
...the US trade deficit is so large that if China were to sell their trade dollars into our market the dollar would collapse.

China does not have to sell any of its existing dollar reserves to precipitate a decline in the dollar - all it has to do is stop accumulating dollars. If China stopped accumulating foreign reserves those dollars would be sold.

Other Asian countries that helped prop up the dollar by accumulating foreign reserves may follow China and start selling their surplus trade dollars as well.

The dollar will be in the toilet this year. IMO.
At $1.202-trillion, the reserves were up 12.7 percent from the beginning of the year and 37.4 percent from 12 months earlier on the People's Bank of China website. IMO the bank doth protest too loudly when questioned if they are selling dollars. Of course not, they say. For the reasons you outlined. But they are, IMO, trying to restrict the growth of the reserves - net result - greenback sales.

The trade surplus stood at $46.6-billion in the first three months, while foreign direct investment reached $15.9-billion.

The two figures added together, $62.5-billion, were well below the increase of $135.7-billion in reserves in the first three months of the year. The bank gave no explanation for the disparity.

Some of the extra forex could be the result of hot money inflows but it could also reflect massive legal transactions, according to Ma Jun, a Hong Kong-based with Deutsche Bank.(You still with DBFX?)

"There were a lot foreign exchange transactions in the first quarter, possibly involving Chinese institutions, firms and individuals selling US dollars in the forex market," he said.

So the pressure for yuan appreciation is actually stronger than the traditional indicators would suggest, such as the trade surplus and foreign direct investment. Simply, my contention remains that their reserves are growing but not at the pace as before and this is because they are selling more and more slowly. But we will still have China forex reserves growing until they move to the Euro. And that will, IMO, happen. I'll justify that at another time.

Parts of the above came from here. Sir, good luck.
Do not focus on making money; focus on protecting what you have.
  • #13
  • Apr 18, 2007 5:17pm Apr 18, 2007 5:17pm
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Quoting NewstraderFX
What you seem to be saying is the exact opposite of what China and the other emerging markets would want to do. They will never stop accumulating $'s, because that would entail the stoppage of trade.

The last thing that China or any of the emerging nation markets want to do is anything which would cause the $ to decline-the weaker their currencies are, the more it's to their advantage (because they are so dependent on trade).
Emerging market economies manipulate their currencies in order to accumulate $'s and drive current ccount imbalances in their favor. The reason they are so dependent on exports, is because their own potential "consumers" are for the most part poor. You can think of it this way: When an emerging market boosts its exports, they're esentially importing consumers.
Excellent analysis NewstraderFX.

However, IMO, the $ is still down the toilet for the forseeable future. Sterling will also suffer sooner rather than later with the Euro (AKA German Mark) ultimately emerging as the dominant currency at least until the Chinese consumer can afford to buy $100 TVs, etc.
  • #14
  • Apr 19, 2007 2:09am Apr 19, 2007 2:09am
FED is a key, but........................

I see GBP/USD going down hard, I have shorts at 2.0100, 2.0092, 2.0079, 2.0056, and newly 2.0038.
I think a short term target of 1.9750 is reasonable, but I will not rule out selling at 1.9850 if I like what I see related to price action, it's moving really wild right now, I'm excited to see what happens either way, it's interesting to watch a currency move when it is in an area that is so psychologically and technically volatile. On the contrary, if it moves higher in an unlikeable fashion, I will abort quick-fast like Ramadan. (the Biggie Smalls fans out there will understand that one)
later
PIPPLE
  • #15
  • Last Post: Apr 19, 2007 2:13am Apr 19, 2007 2:13am
Quoting pipple
FED is a key, but........................

I see GBP/USD going down hard, I have shorts at 2.0100, 2.0092, 2.0079, 2.0056, and newly 2.0038.
I think a short term target of 1.9750 is reasonable, but I will not rule out selling at 1.9850 if I like what I see related to price action, it's moving really wild right now, I'm excited to see what happens either way, it's interesting to watch a currency move when it is in an area that is so psychologically and technically volatile. On the contrary, if it moves higher in an unlikeable fashion, I will abort quick-fast like Ramadan. (the Biggie Smalls fans out there will understand that one)
later
PIPPLE
I like your avatar.
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