Business | Markets
Intervention in currency markets
By and large, governments love to meddle. That makes their absence from currency markets for most of this decade all the more impressive.
- Financial Times
- Published: 00:01 March 16, 2008
By and large, governments love to meddle. That makes their absence from currency markets for most of this decade all the more impressive.
Policymakers from the world's most developed nations seem to share the view that currencies should trade freely. But given the sharp moves in exchange rates this week, particularly the fall of the dollar, there is growing talk of intervention.
Fears are growing that the rational rebalancing of global currencies has degenerated into a full-scale dollar crisis. On many measures the dollar is already cheap, but a plunge in confidence in the currency, and in dollar-denominated assets, risks a vicious circle of selling.
If policymakers collectively feel that currency markets have lost the plot, they may well step in. Past co-ordinated efforts - for example reversing an overstretched yen in 1995 - were surprisingly successful.
So far, most countries have been more or less happy to watch the dollar slide. In spite of its supposed "strong dollar policy", the US economy needs all the help it can get. In the euro zone, export growth has performed well even as the euro strengthened and a rising currency has helped keep a lid on inflation. Meanwhile, the yen's jump against the dollar is relatively recent and, versus a basket of currencies, Japan's exporters look far less vulnerable.
There are good reasons to believe that policymakers will remain on the sidelines even if exchange rates get further out of whack. One of the G7's most pressing goals is persuading China to let its currency move to the whims of the market - any co-ordinated intervention would be seen as hypocritical. Another problem is that intervention is more effective when global monetary policy is aligned. So far, just the US economy has hit a wall. If the rest of the world follows, the probability of intervention will rise, but it is by no means certain.
Unilever and Reckitt
Imagine, for a second, that Unilever's latest turnround plan does not work. Patrick Cescau, chief executive, has slimmed management, cut costs, shed some underperforming assets and so far delivered three years of steady, if gradual, improvement in performance. An expensive restructuring plan is designed to push up margins. But if the consumer goods group trips up, perhaps on rising raw material prices, calls for more radical action will be heard. What might plan B look like?
One option could be an attempt to import the culture from a smaller and more nimble rival. Reckitt Benckiser, which has successfully increased sales in developed markets where Unilever largely stagnates, leaps to mind. The household goods group was itself created in 1999 when the management of Benckiser in effect took control of the larger but struggling Reckitt & Colman. The combination of beermakers Interbrew and AmBev in 2004, where the latter's cost-cutting experts took the reins at the newly created InBev, is a similar precedent.
Even if a deal could be agreed with a limited premium, it would be expensive for Unilever. Reckitt, with an enterprise value of £19 billion versus Unilever's £56 billion, is more highly rated - it has traded at an average 42 per cent price/earnings premium to the Anglo-Dutch conglomerate since 2000. There are risks that Reckitt's model, focused on fewer than 30 key brands, could not be applied across Unilever's portfolio of 400.
Still, as with any marriage of consumer goods groups, there would be plenty of potential cost savings. After seven straight years of margin improvement but now facing slower earnings growth, Reckitt would gain access to Unilever's broad distribution platform across developing markets. And the challenge of transforming a behemoth would surely appeal to its ambitious management team. Such a tie-up remains a distant prospect while Cescau continues to deliver, but if he does not, it is an intriguing alternative.
Share this article
More from Markets
More from Business
Popular in Business
-
General
Precious jump
Gold prices at new high as India's central bank buys $6.7b worth of gold
Business Editor's choice
-
UAE companies in full force at WTM
Seventy-eight participants are from Dubai and 50 from Abu Dhabi
-
DIFC committed to high standards
Ensures an efficient process to serve the business community
-
Sweet life in the Middle East
A sweet look at the confectionary industry in the UAE and Middle East
