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Analysts urge steps to soothe jittery investors
The world's major central banks urgently need to calm wild swings in major exchange rates, the latest manifestation of a deepening global financial crisis and one which has sent the US dollar and Japanese yen soaring against European and emerging markets currencies.
- Agencies
- Published: 00:08 October 25, 2008
London: The world's major central banks urgently need to calm wild swings in major exchange rates, the latest manifestation of a deepening global financial crisis and one which has sent the US dollar and Japanese yen soaring against European and emerging markets currencies.
Foreign exchange analysts said extreme currency volatility, which has seen moves of a staggering 10 per cent on some major rates yesterday alone, could see the Group of Seven or 20 top central banks intervening soon to stabilise world markets.
Japan's yen soared yesterday against the dollar and euro and one-month implied volatility rates on the dollar/yen exchange rate surged more than 20 percentage points to almost 45 per cent, prompting Japanese Vice-Finance Minister Kazuyuki Sugimoto to warn against such rapid and excessive currency moves.
Surpluses
As global investors grow fearful of a world recession and intense financial stress, they are cutting cross-border investments everywhere and repatriating money. Japan's huge external surpluses buoy its yen in that environment.
What is more, central bank interest rates everywhere are expected to fall sharply soon to offset the world slowdown and currencies supported by relatively high nominal interest rates now are suffering disproportionately from the speculation.
ING's chief foreign exchange strategist Chris Turner said currency volatility over the last two months had, to a large extent, been a symptom, not a cause, of the global financial crisis.
Exacerbation
But he added that this week's spike in volatility now seemed to be exacerbating global asset market declines.
"G7 central banks may need to exercise their mandate of ensuring orderly foreign exchange markets by intervening in foreign exchange markets," Turner said.
Analysts said the six per cent collapse in the dollar/yen exchange rate towards 90 per dollar yesterday contributed to a near 10 per cent fall in the Nikkei - which itself has set the tone for sharp losses on European bourses and indications of a Wall Street slide too.
"The scale and pace of movements in major foreign exchange rates this week have been sufficiently disorderly to justify immediate currency intervention by the authorities," said Joe Prendergast, currency strategist at Credit Suisse in Zurich.
Analysts said G7 central bankers may be waiting to co-ordinate some response with the International Monetary Fund.
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