Tuesday, 5 February 2013

Did I hear the words "exchange rate policy"?

A quick reminder that anyone mad enough to want to meddle with the world's major currency pair, the euro vs the dollar, ought to be locked up for life in a lunatic asylum.

The last time a "concerted exchange rate policy" was put in place on the dollar was at the Louvre agreement in February 1987. G7 countries decided then that the dollar was "low enough" and that they would intervene if it did go any further.

The problem was that, in retrospect, it turned out to be not that low at all. And since it was "blocked" on the way down, then something else had to give, namely interest rates.  So up they went. 10y Treasuries, which yielded 7% in January, went down 17% in price, to a yield of 9.50% in late September. Then everything exploded and yields on Treasuries climbed up to 11% intraday on October 19th, causing the Dow to drop by an unprecedented 22.5% on that day.

And that is not all, since among the Louvre agreement's long term casualties was Japan, forced to keep domestic interest rates low in spite of a huge asset bubble, from which it has not yet recovered... 

No comments: