Lately, we have seen that one-sided FX intervention does little to stop currency weakening. Unilateral interventions such as we have seen in Japan are unlikely to end the dollar rally. Japan’s efforts so far demonstrate that their actions have only had a short-term impact, but no influence on the weakening JPY trend. Looking back at prior unilateral interventions, in USD/JPY in 1998 and 2011, EUR/USD in 2000, and GBP/USD in 1992 all bring us to the same conclusion: A reversal in the dollar rally will require a shift in macro fundamentals. This means that either the Fed will need to shift clearly with its monetary policy, or the nations that have seen their currencies weakening must raise rates more.
To sum up, the FX intervention whereby countries are actively intervening to prop up their currencies against the USD may dampen the strengthening of the USD in the short to medium term.
FX intervention involves selling of US Treasuries, which adds upwards pressure on US rates and leads to a stronger USD in isolation. This FX intervention USD doom-loop (illustrated below from the perspective of Japan) could lead to dollar overshooting – especially when several central banks are enforcing the loop.
- Nordea
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