Currency intervention still remote Krishna Guha and

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Peter Garnham, FT Syndication Service
WASHINGTON: The co-ordinated effort by global central banks to step up liquidity support for financial markets has prompted some in the markets to speculate that co-ordinated currency intervention to support the dollar could be next.
The short answer appears to be that while the prospect of currency intervention is probably less remote than it was a couple of months ago, it remains highly unlikely.
"The co-ordinated efforts were to normalise conditions in the money markets," says Hans Redeker, a currency strategist at BNP Paribas. "This does not mean foreign exchange intervention is imminent."
Analysts say both the practical and principled obstacles to intervention remain strong, and calls for international action have weakened with the recent stabilisation of the dollar against the euro and other freely floating currencies.
The US is meanwhile reaping the benefits of a lower dollar in the form of rapid export growth, which policymakers see as a vital buttress for the weak US economy.
A case can still be made for currency intervention. Some former Clinton administration officials in the US believe that co-ordinated intervention - or the credible threat of it - could reduce the likelihood of a disorderly dollar depreciation.
That in turn could give the Federal Reserve, which is concerned about the possibility of such a chaotic decline, greater latitude to cut interest rates and keep the US out of recession, these former officials argue.
Moreover, as the credit crisis has worn on, global policymakers have shown increasing willingness to co-ordinate their actions and consider relatively unorthodox solutions - such as an interest rate freeze on some subprime mortgages in the US, or the new credit auction facilities unveiled this week.
Some analysts point to a slight change in the language of Hank Paulson, the US Treasury secretary, who has spoken out increasingly robustly on the "strong dollar" policy over the past two months. However, people close to the US administration say Mr Paulson continues to be highly sceptical about currency intervention.
"He believes that the value of the dollar, the euro and the yen are determined in massively liquid global markets and your ability to affect these values is near zero," says a Bush administration ex-official.
This former official says the US Treasury thinks currency intervention could backfire by exposing the impotence of policymakers to affect market exchange rates. Any change in policy is politically dangerous for the Treasury secretary as well, he adds.
A further big obstacle to any successful intervention is the divergence in monetary policy stance between the Federal Reserve and the European Central Bank.
Many economists believe that the global currency interventions of the 1980s - such as the Louvre Accord and the Plaza Accord - were successful in large part because market participants believed that the big central banks would conduct monetary policy in a way that was consistent with the currency objective.
However, today the world's big central banks are collectively much more independent than they were then.
And while they are of one mind on the issue of liquidity support, they have very different views on monetary policy.
A recent ECB working paper on the conditions for effective intervention highlights the need for currency intervention to be consistent with interest rate policy.
"It would destroy central banks' credibility to add euros into the market and take out dollars while the ECB maintains its tightening bias and the Fed is cutting rates," says Mr Redeker. "You need FX intervention to be in line with monetary policy otherwise it totally lacks credibility."