Thursday, January 5, 2012

Can central banks beat the currency markets? (ICN, BZF, FXY) - NASDAQ

Legendary investor Jim Rogers once observed that a weak currency is the sign of a weak economy, which is the sign of a weak government. Governments from around the globe were very active in the currency markets in 2011, alternately seeking to weaken and strengthen their own currencies.

In an article by Erin McCarthy and Prabha Natarajan in The Wall Street Journal, the intervention by sovereign governments in 2011 was detailed.

Interestingly enough, the activities of the United States Federal Reserve Bank under Chairman Ben Bernanke which some -- particularly China -- regard as measures to weaken the U.S. dollar to increase exports were not cited.

Brazil spent over $50 billion to protect the real ( BZF , quote ).  Japan intervened three times to lower the value of the yen ( FXY , quote ).  India limited trading on the rupee ( ICN , quote ), which still fell greatly over the past 52 weeks.

As noted in The Wall Street Journal article by McCarthy and Natarajan, "In some cases, central banks defied the conventional wisdom that the market always wins."

While this is true, as the emminent economist John Maynard Keynes once noted, "The market can stay irrational a lot longer than you can stay solvent." Central banks have failed in the past, as no less a figure than George Soros knows well.

Due to the eurozone crisis and more quantitative easing coming from the Federal Reserve, the new year is sure to feature very active buying and selling by central banks around the world to adjust the price levels of currencies.

Unsurprisingly, the nations with the most foreign reserves do best in currency interventions.  As such, China, with $3.5 trillion, and Japan, with $1.3 trillion, will be imposing forces in the 2012 foreign exchange markets in advancing the interests of the yuan and the yen.

About activities such as these in affairs among nations, Winston Churchill counseled that the strong do as they will, the weak suffer what they must.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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