Central banks are taking on the foreign exchange market again. Last week, the Swiss National Bank (SNB) said that the Swiss franc is “massively overvalued”. That’s after it soared to record highs against the dollar and the euro, threatening the economy by making exports more expensive. The SNB cut its key lending rate to zero and made SFr50bn of liquidity available to banks in order to loosen monetary policy and make the franc less attractive. Japan intervened directly in the currency markets, selling yen to ease the pressure on its export-driven economy. Brazil’s government, having already resorted to a tax on short-term capital inflows, has introduced a tax on bets against the dollar in the futures market in order to weaken the Brazilian real.
But by early this week the Swiss franc was back at record highs against both the dollar and the single currency, while the yen was again creeping higher against the greenback. Nor is the real expected to weaken significantly as a result of government interference. Currency intervention only tends to reverse a trend if it is co-ordinated among several central banks. What’s more, the Brazilian government’s measures “do not address the underlying forces that are leading the real to appreciate”, says Goldman Sachs’s Alberto Ramos. Brazil’s relatively high growth, along with the highest real interest rates of the major economies, make its currency appealing to global investors, and stubborn inflation means interest rates are unlikely to fall in a hurry.
It’s a similar story with the yen and the franc. They are both classic safe havens, and there is now an “insatiable market appetite” for them given the “dire underlying situation”, says David Bloom of HSBC. With America weakening and Europe’s debt crisis dragging on, without “full-blown co-ordinated [intervention], the Japanese and Swiss will ultimately fail”.