Paris, Saturday, September 23, 2000 Banks Catch Traders on Wrong Foot
By Tom Buerkle International Herald Tribune
LONDON - Like many of the world's currency specialists, Russell Jones, a foreign-exchange analyst at Lehman Brothers International, had just told clients in his latest advisory note that there was virtually no risk that central banks would intervene to defend the euro this week. After all, leading nations had shown no sign of consensus ahead of the meeting of the Group of Seven in Prague this weekend, and the odds seemed negligible that the U.S. Treasury would agree to action that would depress the dollar just weeks before a presidential election.
So when news broke just after noon here Friday that the U.S. Federal Reserve had joined the European Central Bank, the Bank of Japan, the Bank of England and the Bank of Canada in buying euros, traders in Lehman's dealing room were stunned.
''It started off shocking people,'' Mr. Jones said. ''An awful lot was said - I don't think you could print any of it.''
The scene was repeated at dealing rooms across the City of London and around the world. The intervention Friday, the biggest concerted action since central banks stepped into the markets to rescue the dollar from record lows five years ago, caught bankers and investors almost totally by surprise. As a result, the euro, which had been trading at around 86 U.S. cents, surged within minutes to a peak of 89.92 cents.
''The element of surprise was definitely there,'' said Alan Collins, global head of foreign exchange at J.P. Morgan & Co. ''The fact that it was the Fed leading the charge - the market had to stand back and take notice.''
The frenzy did not last long, however, and that pointed to a real challenge for the central banks. Unlike the dollar's dark days in 1995, or the turmoil that broke apart the European Monetary System in the early 1990s, the euro has been driven lower in recent months by genuine investment flows, rather than speculation by hedge funds or other short-term players. After it failed to catch speculators short, the intervention started to lose some of its impact late in the day.
''It was one of the most lively days'' since the euro was introduced in January 1999, said Jim O'Neill, currency strategist at Goldman Sachs International. But he added that it was ''nothing like the Plaza and Louvre accord days.''
The Plaza and Louvre accords were G-7 agreements that helped bring the dollar down from its sky-high levels in the mid- to late 1980s.
''It's hard to say there's a lot of blood on the street,'' Mr. Collins said.
The euro also suffered a bit late in the day when Treasury Secretary Lawrence Summers explained U.S. support for the intervention - but then added his habitual refrain that a strong dollar was in Washington's interest.
''My boss is saying, 'What the heck do they want?''' Mr. Jones said.
Still, the action by the central banks did succeed in shaking the market out of its complacency that selling the euro was a one-way bet. The banks also have put the credibility of the G-7 on the line, a high-stakes gamble but one that could shift investor sentiment toward the euro.
''What they've done here is draw a line in the sand,'' Mr. Collins said. ''Once you do that, you've got to defend it.''
Mr. Jones said the experience of 1995, when financial authorities intervened repeatedly over two months to help the dollar recover from record lows against the yen, suggested that the central banks may have to act several times in coming days and weeks.
Perhaps more important than its effect on the euro, the move on Friday also sent a signal that the authorities were determined to take action to preserve market confidence and sustain global growth.
Bob Sinche, currency strategist at Citibank in New York, said there appeared to be more than a coincidence between the intervention and Vice President Al Gore's call Thursday for a drawdown from the U.S. strategic petroleum reserve to bring down oil prices.
''The markets were saying, 'We've got a collapsing currency in the euro and soaring oil prices, and I'm not so sure anyone's in charge,''' he said. ''In a sense, in 24 hours we've addressed two of the big issues that were threatening financial stability. We have more confidence that there is some leadership, that the big risks are being addressed.''