What Drives Central Bank Decisions to Intervene?
Central Bank watchers everywhere have a new pastime: comparing the behavior of America's Federal Reserve (Fed) with that of the European Central Bank (ECB). Although the approach to interest rate management by the two central banks has claimed the most attention, the different styles of each in their interventions in global currency markets bears watching because of their impact on growth.
The euro's value dropped markedly against other major currencies, particularly the US-dollar and the Japanese yen, after its launch in January 1999. Because the exchange rate influences an economy's competitiveness, the euro's depreciation benefited EU exports and exporters--t the expense of their American counterparts.
So you might think that US industries exposed to severe international price competition would deem the dollar's strength undesirable. American politicians who fret about America's mounting current account deficit should also have shown concern. Yet, barring particular sectors like steel, most American politicians and bosses bit their tongues about the dollar's strength and few, if any, have jumped for joy at its recent decline.