G7 Statement: Words, Not Deeds

Summary

• The G7 statement does not signal co-ordinated action, but it greenlights Japan’s FX intervention.
• The US typically supports co-ordinated action to depreciate the dollar when external deficits are extreme or a major global financial crisis is underway. That is not the case today.
• The dollar is strong because US growth is outpacing RoW. Intervention may buy time for Japan (and China), but they must go it alone.

Market Implication

• The broad dollar can continue to strengthen, but perhaps with more limited scope against Asian currencies.

G7 Statement Echoes Japanese Comments

Dollar strength has been worrying Japanese policymakers for months, but on Thursday Kanda added another player to his game: G7. Kanda stressed the G7’s statement that  ‘excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability.’ And while the G7 has reaffirmed this stance since including it in May 2017, this is the first time it has been outwardly stressed since then. This suggests the G7 is affirming Japanese concerns about dollar strength.  

The trade-weighted dollar is trading near multi-decade highs. Previous dollar highs saw co-ordinated attempts to lower the dollar: the Plaza Accord in 1985, joint US-Japan intervention in USD/JPY in 1998, joint G7 intervention to stabilize the euro in 2000 and even the so-called Shanghai Accord in 2016 (Chart 1).

The timing of these agreements do not align with dollar peaks. The Plaza Accord to weaken the dollar was established in September 1985, yet the peak was six months earlier.

The euro intervention started in September 2000, yet the dollar rallied into October and only meaningfully trended down in 2002.

The apparent Shanghai Accord in early 2016 initially coincided with dollar weakness, but this reversed a few months later.

Conditions Not Met for Coordinated Intervention

The Plaza Accord (1985), US-Japan intervention (1998) and Euro interventions (2000) were triggered by shared concerns about excessive global imbalances or global financial crisis. To recap quickly:

• In the run-up to the Plaza Accord, the US current account balance went from a small surplus in 1980 to a deficit of 3% of GDP in 1985. That sounds almost mundane by today’s standards, but at that time, it was a post-WW2 high and considered an alarming indicator for the US economy.
• The joint US-Japan intervention in USD/JPY in 1998 occurred amid the broader Asian Financial Crisis, motivated by a desire to prevent further meltdown. An additional factor in the US decision to rescue Japan was fear the JPY slide would force China to devalue its currency too, setting off another chain reaction.
• In the run-up to the 2000 joint G7 intervention to support the EUR, America’s current account deficit had widened from -1.5% of GDP in 1995 to -3.5% in 2000. This was not the main concern, though – the Clinton Administration, with Larry Summers running the Treasury, was initially reticent on the project. But in the end, fears a collapse of the fledgling Euro might trigger a meltdown in the Union swayed them.
• In contrast, the US current account was not at extreme levels during the so-called Shanghai Accord, which was the least successful in turning the dollar trend.

Today, the US current account deficit is large at 3%. But it has reduced from 2022’s 4%. So the Biden administration is unconcerned about it. Moreover, Japan, or other Asian allies, face no risk of a financial meltdown from a currency devaluation.

The conditions for joint intervention are simply not in place. The Fed will not cut rates for the sake of narrowing yield differentials, nor will the Treasury coordinate with others on FX intervention, as this could boost US inflation.

Far more likely is that Japan’s MoF go it alone. We also watch the BoJ meeting on 25 April, in case of a surprise hike.

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

Mirza Baig is a Senior Macro Strategist at Macro Hive, specializing in EM research. He has been researching and trading global FX & rates products for over 19 years, boasting affiliations with Morgan Stanley, BNP Paribas, Deutsche Bank, and Point 72.

Ben Ford is a Researcher at Macro Hive. Benjamin studied BSc Financial Mathematics at Cardiff University and MSc Finance at Cass Business School, his dissertations were on the tails of GARCH volatility models, and foreign exchange investment strategies during crises, respectively.

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