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Several central banks have ventured into unusual territory in the first few weeks of this year, announcing currency sales in advance as they draw a delicate line between mitigating the impact of a falling dollar and avoiding the wrath of the US Treasury.
Since the beginning of January, central banks Chile, Israel and Sweden all presented plans to sell their currencies in the forex markets. Policymakers in Poland have also published a verbal warning to the zloty bulls that they can intervene.
These moves underline the pressure on small currencies which are pushing higher in response to a large drop in the dollar, curbing inflation in their national economies and threatening exports at a time when world trade remains fragile. But preliminary warnings also suggest that policymakers wish to avoid labeling themselves as currency manipulators – a headline Switzerland and Vietnam won from the United States last year.
“We’re in an interesting time when it comes to central banks straddling the fine line between [foreign exchange] intervention and [foreign exchange] manipulation, ”said Alan Ruskin, chief international strategist at Deutsche Bank in a recent note to clients.
“While each of the [central banks] has different motivations, they seem to dance deftly around possible US censorship. It’s a slippery slope, ”he added.
Under pressure from the Federal Reserve’s promises to keep interest rates potentially low for years to come, the dollar has weakened by nearly 7% over the past year against a basket of peers, returning currencies from emerging markets and trade sensitive economies. outbreak.
In January, the Israeli shekel hit its highest level since the dollar since 2008, after surging last year as the greenback lost 7% against the currency. The buck also lost more than 12% against the Swedish krona in 2020 and more than 5% against the Chilean peso.
Policymakers have little scope to cut interest rates further without going below zero, with some having already cut them in response to the coronavirus pandemic. This leaves outright selling of currencies as a key option, although unilateral interventions rarely succeed in changing the direction of the dominant dollar.
Sweden’s central bank, Riksbank, surprised analysts when It said Last month, it would amass foreign exchange reserves over the next three years by selling SKr 60 billion ($ 7.2 billion) annually through December 2023.
Swedish policymakers struggled to stress that this was not a move to weaken their currency – as such moves would run counter to the agreement of the G20 countries and could attract retaliation – but to eliminate the need for the Riksbank to borrow from the Swedish debt office. to finance its foreign exchange reserves.
“This is not monetary intervention and we have made it clear that it is not intended to have an impact on monetary policy,” Heidi Elmer, head of the Riksbank’s markets department told the Financial Times. “Our goal is to make sure that we have properly funded foreign exchange reserves.”
But Robert Bergqvist, senior economist at SEB, noted that the Riksbank had been concerned on the impact of a strong krona on inflation and the possibility of having to lower its key rate again below zero, a little over a year after becoming the first country to raise its rate then negative out of frost.
“It’s a bit controversial for the Riksbank to do because currency sales will act like a headwind and make a rate cut less likely,” he said.
Chilean policymakers have also decided to bolster foreign exchange reserves by buying $ 12 billion over 15 months, citing anticipated political turmoil. Israel, meanwhile, highlighted the risks of the shekel’s rise when it announced it would buy $ 30 billion in foreign exchange this year. By informing the markets of their intentions in advance, central bankers have created a headwind for these currencies.
“The question you need to ask yourself is, would central banks act this way if the exchange rate went the other way? I don’t think so, ”said Deutsche Bank’s Ruskin.
Monetary interventions are stigmatized because large central banks generally accept that exchange rates are determined by the market. “I see an environment in which currency intervention becomes a more important tool for macroeconomic management,” said Ed Al-Hussainy, senior currency and rates analyst at Columbia Threadneedle.
“Perhaps this is a polite way of saying that currency wars are more likely,” he added.
Goldman Sachs analysts also expect more intervention from emerging market central banks if the dollar continues to fall as expected. Deutsche Bank’s Ruskin said the danger is that the “surrogate” intervention of a few small central banks could spread and lead policymakers in all parts of the world to a competitive devaluation of the currency.
“What we are seeing is just the first gambit from central banks responding to a weaker dollar environment,” Mr. Ruskin said.
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