A man who wants to lead the orchestra must turn his back on the crowd. The Fed has led its policy of disregard for the currency market for a long time: it doesn’t say whether or not the dollar is priced correctly, how its rate affects monetary policy or forecasts and doesn’t link its rate to exports or inflation. It simply pumps enormous liquidity volumes into the markets, cuts the federal funds rate by 150 base points at special meetings, and switches to average inflation targeting policies. Other central banks can’t behave this way. They have to fight against walls of indifference, or else their currencies risk consolidating.
The “don’t play against the Fed” principle didn’t frighten a brown bear in the forest. Saying that the federal funds rate will be kept low for a long time, Jerome Powell signed the greenback’s death warrant. However, EUR/USD bears started counter-attacking just a few hours later. What an insolence! Everyone should live in peace and friendship with the central bank. Just like with the wife. My wife told me she was fed up with me always agreeing with her. I answered that she was right.
Alas! Consent can’t break walls of indifference. Several banks voiced their intent to soften monetary policy after the Fed chair’s statement at Jackson Hole. The Reserve Bank of New Zealand, the Bank of England, and the Bank of Japan said they were ready to extend the relief package if necessary, while the ECB linked the rate to forecasts and monetary policy. Key economist Philip Lane’s speech shocked the market, but verbal interventions don’t fill the belly in this situation anyway.
The history knows many examples of when currency interventions were useless. For example, the BoJ spent $80 billion from January 1999 till April 2000 in order to prevent the yen from consolidating, but USD/JPY started growing only when the clouds gathered over Japan’s economy. In November 2000, the ECB used the same instrument for reviving the euro that had fallen to its historical trough of $0.823, but the single European currency started consolidating only when investors lost interest in the US economy. If direct interventions into Forex don’t work, can mere words be helpful?
On the contrary, verbal interventions can be harmful. They can draw Donald Trump’s attention, and he believes speaking about currency rates is his exceptional right. Before Trump became president, many thought he must have problems if he’s in a bad mood. In fact, if Trump is in a bad mood, it’s everyone else’s problem. I’m afraid Philip Lane’s passionate speech may provoke the US president’s anger. The ECB risks being accused of starting a currency war, which may be cold water for it because it’s Jerome Powell who started “hostilities” at Jackson Hole. However, it’s scientifically proved that cold water dousing may be funny, regardless of who’s being doused.
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