G7 fail to reach an intervention deal to ease soaring dollar pain

 Japan and other countries facing the fallout from a rising U.S. dollar found little solace at last week’s meetings of global finance officials, with no sign of joint intervention after the The model of the “Plaza Accord” of 1985 underway was the horizon.

With a strong push from Japan, financial leaders of the group of seven advanced economies added in a statement on Wednesday that they will be closely monitoring “recent volatility” in markets.

But the warning and threat of another yen-buying intervention by Japanese Finance Minister Shunichi Suzuki failed to prevent the currency from slipping to fresh 32-year lows against the dollar as the week ended.

While Suzuki may have found allies grumbling about the fallout from the Federal Reserve’s aggressive rate-hiking path, he acknowledged that no plan for coordinated intervention was in the works.

“Recognizing the need for vigilance against the spillover effect of global monetary tightening, many countries mentioned currency movements in this context. But there was no discussion of what coordinated steps could be taken,” Suzuki said at a news conference Thursday after attending separate meetings of G7 and G20 finance leaders in Washington.

US Treasury Secretary Janet Yellen made it clear that Washington has no appetite for concerted action, saying the dollar’s overall strength was a “natural result of differing paces of monetary tightening in the United States and other countries.”

“I’ve said on many occasions that I think a market-driven value for the dollar is in America’s interest. And I continue to feel that way,” she said Tuesday when asked if she would consider a Plaza Accord 2.0 deal.

NO YEN SUPPORT

In 1985, a destabilizing rise in the dollar prompted five countries – France, Japan, the United Kingdom, the United States and then West Germany – to join forces to weaken the US currency and reduce the US trade deficit. After the deal, dubbed the Plaza Accord after the famous New York hotel where it was negotiated, the dollar lost about 25% of its value over the next 12 months.

With the US currently uninterested in such a deal, other countries must find ways to ease the pain caused by a strong dollar, which has forced some emerging markets to raise interest rates to defend their currencies, themselves more than they want at the expense of economic growth.

Emerging Asia has seen significant capital outflows this year that are comparable to previous episodes of stress, increasing the need for policymakers to build liquidity buffers and take other steps to prepare for turmoil, said Sanjaya Panth, deputy director for Asia and Asia Pacific International Monetary Fund Department.

“The situation for Asian economies is very different than it was 20 years ago,” as countries have accumulated foreign exchange reserves making them more resilient to external shocks, Panth told Reuters on the sidelines of the IMF-World Bank annual meeting in Washington on Thursday.

“At the same time, rising debt levels, particularly in some of the regions’ economies, are a cause for concern,” he said. “Some form of market stress cannot be ruled out.”

The Bank of Korea announced its second 50 basis point rate hike on Wednesday, highlighting that the won’s 6.5% fall against the dollar in September, which pushed up import costs, played a key role in the decision.

South Korea’s central bank governor Rhee Chang-yong said Saturday he felt no interest from US officials in curbing the dollar’s strength through joint interventions.

But he said some sort of international cooperation on the dollar might be needed “after a period of time.”

“I think too strong a dollar, especially over a longer period of time, will not be good for the United States either, and actually I’m thinking about the long-term impact on the trade deficit and maybe another global imbalance can happen,” he said .

In Japan, the government has a responsibility to deal with a renewed slump in the yen, driven in part by the policy divergence between the Federal Reserve’s determination to raise US interest rates and the Bank of Japan’s determination to keep borrowing costs extreme to keep low is caused.

At the press conference where Suzuki warned of a sharp fall in the yen, BOJ Governor Haruhiko Kuroda again ruled out the possibility of a rate hike.

The dollar rose about 1% on Friday to a fresh 32-year high of 148.86 yen, testing the authorities’ resolve to combat the Japanese currency’s unrelenting slide. The dollar/yen pair is now about 2% higher as Japan intervened on September 22nd to buy the yen for the first time since 1998.

Japanese politicians have said they will not seek to defend any particular yen level, instead focusing on smoothing volatility.

Masato Kanda, the country’s top currency diplomat, told reporters on Friday that the authorities stand ready to take “decisive action at any time” if the yen’s overly volatile moves continue.

However, even the moderation of abrupt yen moves could pose a challenge, as Kuroda’s pledge that the BOJ will keep interest rates in negative territory gives investors the green light to continue dumping the currency.

“It is impossible to reverse the yen’s downtrend with single-handed intervention,” said Daisaku Ueno, chief forex strategist at Mitsubishi UFJ Morgan Stanley Securities.

“Once the yen falls below 150 against the dollar, it’s hard to predict where its depreciation might stop as there is no technical chart support until around 160,” he said.

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