Special report: global recession
Charlotte Denny and Heather Stewart Monday August 20, 2001 The Guardian
Central banks must intervene to steady the dollar's decline against other currencies to prevent a meltdown that could threaten the global economy, two leading City economists warn today.
The greenback has lost more than 10% of its value against the euro over the last two weeks and is expected to come under new pressure when markets open this morning.
Stephen King and Peter Oppenheimer at HSBC Global markets say that, while a modest decline in the dollar against the euro could be good for Europe and the United States, the currency must not be allowed to weaken against the yen, because that would pile more pressure on the recession-hit Japanese economy.
If the dollar collapsed: "It would be bad for Europe and disastrous for Japan," they say. "The Japanese economy would be dragged further into a deflationary spiral resulting in a renewed profit collapse."
With the Federal Reserve is expected to cut US interest rates this week for the 7th time this year as concerns continue about the possible depth of America's economic slump, the research calls for a "radical" commitment from G7 nations to target a "managed decline" in the dollar, intervening to bring it about if necessary.
A gradual depreciation would help hard-pressed US manufacturers, who have been voicing concern about the effects of Washington's strong dollar policy on their competitiveness. But concerted action by world governments will be needed to protect the world economy from the dangers of a "disorderly" fall.
To prevent a meltdown, HSBC says the Japanese authorities must cut their borrowing so that Japanese savers are forced to look abroad for investment opportunities.
Washington and Tokyo must be prepared to step into the markets to cap the yen's rise, and perhaps to maintain the euro's appreciation against the dollar.
The European Central Bank would have to cut interest rates "aggressively" in this scenario, stimulating European consumer demand to keep the single currency buoyant and cushion the global economy from slowdown by making euroland a "consumer of last resort." ECB policy makers have been criticised for cutting rates only once this year in the face of global slowdown.