Calling the shots on currencies

In the “Official CurrencyPolicies and Rhetoric: Currency policy or currency stance" I list a number of reasons why national governments are reluctant to get involved in trying to influence the value of their currencies. Chief among these are the size and extent of the global forex market and the need for nations to reach agreement on whether adjustments are even needed. One venue covers most of these bases and provides national governments with a collective voice to express their will on currencies: the G7. (We look at the G7 in greater detail in my January post )

If governments had their way, they would probably prefer to see fixed exchange rates replace floating rates and avoid the whole subject entirely, but that’s not a realistic option for the foreseeable future. Confronted with the realities of forex markets, most government currency officials go to great lengths to avoid discussing currency values out of fear that their comments will be misinterpreted and lead to sharp exchange rate shifts. That fear was born out of experience, and today's top currency officials are much more discreet than their predecessors just a few decades ago.

Responsibility for currency matters typically falls to the finance ministry or the central bank in the nations of the most heavily traded currencies. We will take a look at who has responsibility for setting and implementing currency policies in the five major currencies and what their major motivations are.

The United States

The Department of the Treasury has the legal mandate for all currency matters, from printing the notes and minting the coins to ensuring the soundness of the U.S. dollar in international markets. The secretary of the Treasury is the primary spokesman for the U.S. dollar. The deputy Treasury secretary for international affairs is the hands-on Treasury official responsible for day-to-day currency matters. 

When the Treasury secretary speaks on the value of the dollar, or any other currency for that matter, FX markets listen.

The Eurozone

The European Central Bank (ECB) is responsible for both monetary policy and currency matters under the agreement that created the single-currency Euro in 1999. The ECB’s central council is the primary decision-making body; it’s composed of the presidents of the central banks of the 12 participating nations, with the ECB president as the group's chief policy maker and spokesman.

When the ECB needs to intervene in the market, it can do so by itself, along with the central banks of the member states on its behalf.

However, individual European countries continue to exert influence over currency policy through their finance ministers, who had responsibility for currencies prior to the introduction of the euro and the creation of the ECB. The Eurozone finance ministers meet regularly as a group and frequently weigh in on forex market developments. There still appears to be great consideration given to the member states’ governments by markets with regard to currency values, with the two largest European economies - Germany and France - wielding the greatest influence. But consensus appears to be the key element in deciding if the euro is too strong or too weak, and a clear majority of member states needs to be on board in opposing market movements before the market will pay attention.

The ECB is primarily concerned with fighting inflation and seeks to achieve currency stability as a means of fostering long-term economic growth. Europe remains heavily export oriented, so extreme euro strength is the most likely risk factor for any future forex market interventions out of Europe.

Japan

The Ministry of Finance (MOP) is responsible for currency matters in Japan. The MOF is the most powerful government ministry in Japan and can wield more influence over economic affairs than even the Bank of Japan (BOD, the central bank. The primary day-to-day currency spokesman for the MOF is the vice minister for international affairs. It is not at all uncommon for the MOP to issue daily comments on the forex markets, particularly when volatility increases.

Japan's economy remains highly export oriented, and the value of the JPY is believed to be influenced by the MOF and kept artificially weak. Throughout the 1980s and early 1990s, artificial JPY weakness was a key trade issue between the United States and Japan. This issue keeps this JPY one of the most politically driven of the major currencies. To avoid accusations of official manipulation of currency rates, the MOP frequently uses proxies to do its bidding. The most common substitute is Kampo, the Japanese postal bank’s pension fund, which has assets well over $1 trillion. So even if the BOJ is not in the market, a Kampo-buying order or selling order for several billion dollars can accomplish the same objective.

Great Britain

The chancellor of the exchequer (treasury secretary or finance minister) is the individual responsible for the British pound’s fate. The governor of the Bank of England (BOE) also shares responsibility for the pound in a bit of a holdover arrangement from when the BOE became independent from the government in the late 1990s.

The chancellor/BOE generally stays out of currency matters and appears most concerned with the pound's exchange rate versus the euro, because the bulk of UK trade is conducted with the Eurozone. The story behind that dates back to 1992, when the British pound imploded and was forced to withdraw from the European Exchange Rate Mechanism (ERM), the predecessor arrangement leading up to the euro. So if you’re waiting for the chancellor or the governor to speak up on currency matters, don't hold your breath.

The United Kingdom is closely aligned with European economies and would be a candidate to join the Eurozone single currency, but nationalism runs deep when it comes to getting rid of the pound.

Switzerland

The Swiss National Bank (SNB) is charged with responsibility for the Swiss franc along with setting monetary policy. The SNB is most concerned with the Swiss franc’s exchange rate versus the euro, because nearly 80 percent of Swiss trade is conducted with Eurozone nations. The SNB has been known to speak up in opposition to CHF strength or weakness whenever the EUR/CHF exchange rate approaches extreme levels. Instead of engaging in open-market intervention, in the past the SNB has indicated that it may use interest rates to prevent excessive Swiss franc weakness, which is especially troublesome because it can import inflation and undermine SNB monetary policy.