FX markets are trapped in a vicious circle
July 4 (Reuters) -FX markets are trapped in a vicious circle where the proceeds of interventions are recycled with dollars sold then purchased to maintain or increase the size or reserves which ultimately leads to more intervention.
There are many emerging nations currently trying to stem the dollar's rise including China and also Japan which most analysts think will soon sell again.
Despite spending huge sums in an attempt to suppress the dollar, it has risen strongly this year and is pressing multi-year and even record highs versus the currencies where central banks are trying the hardest to stop it from going up.
The big issue is that most central banks are loathe to deplete the reserves which they built to prevent crisis which have severely impacted their currencies in the past. Yet, to replenish reserves after intervening is to buy dollars back, underpinning the greenback versus major currencies like euro, pound and yen.
The support this provides ultimately feeds back, encouraging others to buy dollars versus the currencies where central banks are intervening.
It has taken years, but many of the currencies involved in this cycle have reached the extremes seen during the crisis that led to the reserve building.
Slides which have occurred under normal conditions are much more likely to be sustained, and the harder central banks try and stop them, the more support they provide - unless reserves are allowed to drop, leaving central banks with smaller war chests to tackle the crisis they fear.
For more click on FXBUZ
USD record strength versus growing number of emerging currencies https://tmsnrt.rs/3L9CgXe
(Jeremy Boulton is a Reuters market analyst. The views expressed are his own)
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