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Monday, August 11, 2008 12:50 PM

Currency Intervention And Other Conspiracies

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The US dollar rallied fast and furious last week. The dollar rally was the biggest in 8 years vs. the Euro. This immediately brought out calls of Dollar Intervention such as the one below. Note: the arrow and circle in deep blue were added by me.

click on chart for sharper image

The very large drop recently (the pale blue line) tells part of the story. Another part is told by the Treasury site itself - that recent data about the drop was delayed for almost three weeks before it was made public.

Another part is told by very recent data not being made public for the last two weeks running.

What the ESF did is simply sold about 10 billion Euros and bought dollars - plain and simple massive intervention that virtually everyone has missed or ignored or pretended doesn't exist or whatever.

The raw facts are sitting there at U.S. International Reserve Position.
Assuming one buys the story, what stands out is 13 consecutive alleged interventions that all failed.

Mystery Solved

James Turk on GoldMoney is writing Mystery Solved.
On July 15th the US Dollar Index closed at 71.87, the lowest close since reaching its record low in April. However, rather than continue lower and fall off the edge of the cliff, the Dollar Index suddenly and mysteriously reversed course. It has now risen on 12 of the 17 trading days since reaching that low, and closed today at 74.55, a 5-month high. What caused this index to suddenly pull back from the brink and then reverse course to shoot higher over the past three weeks?

There has not been any news exceptionally favorable to the dollar. In fact, the banking problems in the United States continue to mount, while the federal government's deficit continues to soar out of control. On July 28th Reuters reported that "The Bush administration on Monday plans to project the U.S. budget deficit will soar to a new record...because of the slowing economy and an economic stimulus plan approved this year."

So what happened to cause the dollar to rally over the past three weeks? In a word, intervention. ...
For the record, I respect James Turk. However, there was plenty of news favorable to the dollar.

  • Oil was falling which would help the US balance of trade.

  • Container shipments into the US were weakening which would also suggest an improvement in the balance of trade.

  • Economic activity in Europe had started to crater.
Those are very significant items. I talked about them at length in Trichet Puts Spotlight on the Euro, Dollar.

The dollar rally continued on Friday and I posted some Thursday To Friday comparison charts on the Dollar Index, the Euro, and the British Pound in U.S. Dollar Rally Continues. Here are the charts of the dollar index.

$USD - US$ Index Daily (Thursday Evening)

Click on chart for sharper image

$USD - US$ Index Daily (Friday Evening)

Click on chart for sharper image

Marc Faber Weighs In

There is a very interesting Bloomberg video interview of Faber that I commented on in Marc Faber - Bullish On The US$, Bearish On Commodities.

I transcribed a portion of it. Here is the key snip:

Q: Is the Euro Doomed to keep falling?

A: Whenever global liquidity tightens relatively speaking, it is very US$ supportive. Obviously, there are always time lags between economic events until the the market perceives them. So as a result of weak demand in the US, lower imports, the demand for oil declines, and that led to a tightening of global liquidity which led to the strong dollar. Investors speak of weak oil price as being bullish but the point is that it signals the global economy is in recession already.

Can Currency Intervention Halt the U.S. Dollar’s Nosedive?

Now let's address the question as to whether or not 10 billion Euros would be massive enough to do anything.

GATA the Gold Anti-Trust Action Committee is reporting on the currency intervention option and monetization of oil in its usual conspiracy-minded fashion:
The story below from the Associated Press, the largest news agency in the world, may be most notable for acknowledging the potential for government intervention in the currency markets -- market manipulation, really -- and for reporting the surmise of an expert in the energy business that oil has been monetized, replacing the U.S. dollar as the world currency, becoming the "new gold."
The one thing that made the most sense in the article mentioned was this paragraph. "It would take great sums of money to make any difference. The foreign exchange market is the largest in the world, with over $1 trillion traded each day."

On July 2nd Peter Schiff stated Currency Intervention Won’t Halt the U.S. Dollar’s Nosedive
Intervention advocates must believe that if the European Central Bank (ECB) and a few other central banks joined the fray, that a better outcome would be achieved. However, any additional efforts to artificially prop up the ailing dollar will be equally ineffective.

Even if ECB intervention could slow the dollar’s descent, what possible reason would the Fed’s European counterpart have for doing so? The ECB is already concerned about inflation and is preparing to raise rates as a result.
Interestingly, Schiff claims intervention won't work and the ECB is prepared to hike while others claim intervention was responsible for the rally even though intervention failed 13 consecutive times before there was a success .

A Look At Japan's Intervention in 2003-2004

Japan was intervening in the currency market and you know they were doing it because they admitted it. Please consider this article from 2004 called The dollar and yen: why they matter.
Why is Japan intervening? Because it believes the yen needs to be held down to keep Japanese exports competitive.

The policy of intervention began in earnest in August last year, when the decline of the dollar gathered pace. In 2003, the Japanese government spent $100bn buying dollars in an attempt to hold down the value of the yen. In the first two months of this year, it spent another $100bn. And Japan’s parliament has authorised the spending of a further $360bn this year.
Note those numbers. Japan spent hundreds of billions in 2003 starting in August, attempting to prop up the dollar.

Japan halted its currency intervention in March of 2004 according to the International Herald Tribune article EU officials soften stance on yen's weakness.

Yen vs. Japan's Intervention 2003-2004

click on chart for sharper image

If ever there was proof of the absurdity of currency interventions there it is. Ironically the Yen started plunging shortly after Japan stopped trying to force down the value of the Yen.

So now we are supposed to believe the dollar rallied because of a so called "massive" one time 10 billion Euro trade when Japan produced negative results after spending $300 billion over the course of 7 months!?

The Primary Trend Cannot Be Suppressed

The primary trend in currencies cannot be suppressed and even a cyclical countertrend move cannot be suppressed. The same holds true for gold, silver, and even the equity markets. Sadly we see GATA and others arguing over every tick in gold and silver. The most frequently pointed out item is that there is an enormous cartel that is short silver, thereby suppressing the price.

No one ever bothers to mention that for every short there is a long. It would make nearly as much sense to say there is a massive conspiracy to force up the price of silver. And those doing this ridiculous whining better think through the implications of getting what they seem to be asking for.

Imagine what would happen if the futures trading commission decided to limit silver contracts to what could be delivered in a month's time. I suggest it would not be pretty because the commercials would know what was coming and be prepared in advance. One nice lock limit down opening in silver would start the ball rolling for good.

It's time to realize that gold and silver have rallied massively in 7 years. And if both can do that in the face of such massive intervention, the logical thing for gold and silver bulls might be to ask for more of it.

If and when the US dollar rally fails it will be because the rally was ready to fail. That might be a week from now, a month from now or even a year from now. No one knows. What we do know is intervention (or lack thereof) will not be a factor when it does happen.

There is one more point I want to mention about the US dollar. There is a secular shift underway in the US from consumption to saving. The word that best describes this is "frugality". An frugality is very dollar supportive.

And it was Professor Kevin Depew who coined the phrase It's Cool to Be Frugal. I commented on frugality at great length in The Future Is Frugality.

Inquiring minds will certainly want to take a look.

Here's the deal for dollar bears: The dollar rallied because it was damn good and ready to rally. Those with their eyes open spotted fundamental reasons in advance. Those who did not, blamed intervention.

Mike "Mish" Shedlock
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