The European Central Bank is unlikely to step directly into foreign-exchange markets even in the face of a more than 10% slump in the euro this year, although there is potential for Japan to engage in that kind of intervention if the yen continues to unravel, according to Goldman Sachs Group Inc.
(Bloomberg) — The European Central Bank is unlikely to step directly into foreign-exchange markets even in the face of a more than 10% slump in the euro this year, although there is potential for Japan to engage in that kind of intervention if the yen continues to unravel, according to Goldman Sachs Group Inc.
The US dollar, fueled by a combination of aggressive Federal Reserve monetary policy and haven buying, is trading near its strongest level in decades, steamrolling currencies from Hungary to New Zealand. The euro and yen — the greenback’s most widely traded peers — have struggled to hold their ground, while some countries such as Chile and India have already taken direct action in support of their currencies.
Yet the odds such a move by the ECB in the near-term are low, according to Goldman foreign-exchange strategist Karen Reichgott Fishman, who says President Christine Lagarde and her colleagues have more pressing issues to tackle before shifting their attention toward re-strengthening Europe’s common currency. High on that list are the ongoing surge in inflation, risks to energy supplies, and the deterioration of so-called peripheral bond markets, like Italy’s, whose issues are being exacerbated by ongoing political turmoil.
These problems underpinned the bank’s decision earlier Thursday to lift its benchmark rate by half a percentage point — its first increase in a decade — and provide further details about its newest bond-market instrument, which is aimed at preventing a splintering of the euro area.
“Concerns of fragmentation risks and elevated political uncertainty in Italy ultimately outweighed the initial upward pressure on the euro — highlighting the complicated set of challenges the single currency is facing at the moment,” the Goldman strategist wrote in a report published Thursday. While FX intervention is certainly “in the toolkit” the likelihood of the ECB deploying it is “low,” in her view.
Meanwhile, the Japanese yen is down more than 16% against the greenback so far this year and earlier this month touched its weakest level since 1998. Bank of Japan Governor Haruhiko Kuroda emphasized Thursday his determination to stick with rock-bottom interest rates even if it means a weaker yen.
Yet how long the BOJ can stand pat as its currency plummets is very much an open question still. Reichgott Fishman notes that while interventions by the world’s largest central banks have been rare in recent decades — and when they do occur they’re typically co-ordinated among multiple monetary authorities — the odds that Japan might do something will increase if the dollar-yen rate pushes even higher.
Image and article originally from financialpost.com. Read the original article here.