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Beggar thy neighbor but not to riches PDF Print E-mail
Written by George Albert   

Written for DNA India
August 8, 2011: Beggaring thy neighbor to get rich never works in the long term. Last week the Swiss and Japanese authorities intervened in the market to debase their currencies. It worked for a day.

Beggar thy neighbor is a protectionist policy involving the devaluation of one's currency and the construction of tariffs barriers on other countries. The goal of a beggar-thy-neighbor policy is to increase demand for a country's exports by devaluing the currency to make the country's goods less expensive, while also reducing demand for the countries imports.

US Dollar - Japanese Yen

On August 4th, the Japanese authorities intervened in the currency market to stem the rise against the Dollar and other currencies.  The increased risk aversion in the equity markets last week meant that investors would be looking for safe haven. Japanese yen is considered a safe haven. Additionally, the Yen has been rallying against the dollar, eroding the competitive edge of Japanese exports.

On the intervention the Yen fell against the dollar by nearly 4.5%. However on the next day the Yen rallied again by2.4% erasing more than half the benefit of intervention in just a day. The Japanese never seem to get it. Their repeated intervention over the years have failed with the Yen continuing to appreciate against the dollar. On September 15, 2010, Japanese authorities intervened and the Yen fell by 3.5% against the dollar.The USDJPY pair moved from 83 to nearly 86.

However, the Yen lost that advantage and began to rally against the dollar a few days later a reached a new high of 76.30 on the day of the earthquake on March 17. Given the rally in the Yen the authorities intervened again pushing the USDJPY pair to 85.50 in April. But by the end of July the pair was back to 76.30, prompting more intervention. The charts show that the Yen will continue to rally against the dollar despite the interventions.

US Dollar - Swiss Franc

The intervention by the Swiss did not have much of an effect at the end of the day. The USDCHF pair rallied about 200 pips on the intervention last week from 0.7600 to 0.7800. But by the end of the week the pair was down to close at 0.7661 a 60 pip rise after intervention, which hardly a ring endorsement for the Swiss beggar thy neighbor strategy.The charts show that the USDCHF pair has a lot more to fall.

Swiss Franc - Japanese Yen

The Swiss Franc has been stronger than the Yen and continues to be despite the intervention by both countries. There were some gyrations after the intervention but the pair continues to march on to new highs.

Dollar index

The index, which measures the dollar against a basket of six currencies including the Swiss Franc and Yen, has been range bound between 73.50 and 77.50. The interventions failed to break the trading range. On the day of the intervention the dollar index rallied from 73 to 75.30 a rally of about 2%. However the next day the index fell about 1.25 percent erasing most gains. At the end of the day the interventions of last week is unlikely to have a lasting effect on the markets.