Amber light flashing on U.S. dollar intervention

Mike Dolan
Reuters
Thursday, July 17, 2008

Three days before the last bout of coordinated central bank intervention to calm world currency markets, the International Monetary Fund's top economist opined: "If not now, when?" Many experts are now asking the same.

In 2000, when Michael Mussa urged the world's big central banks to calm the markets, it was the euro's seemingly endless slide which was perceived to be destabilizing the world economy. Now, it is the plight of the U.S. dollar that is ringing alarm bells.

The greenback set record lows again on Tuesday in its alarming downward spiral as severe questions are being asked by overseas investors about the financial reliability of the world's biggest economy and its financial obligations.

Once lost, investor confidence can take years to restore.

The risk to the dollar in that environment is stark and given few governments around the world have any interest in seeing a further devaluation of the U.S. currency, support for concerted intervention is on the rise.

The dollar's decline has clearly exaggerated oil and food prices worldwide, complicating monetary policies from the United States to the euro zone and Britain as well as to the export-oriented economies of Asia and the Middle East.

As the world economy slows after a year of credit turmoil, dollar-exaggerated inflation has tied the hands of central banks everywhere from cutting interest rates, and dollar losses also squeeze the export-driven growth engines of emerging economies.

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