IKS-RUSSIA

The shock came on Wednesday, from the Federal Reserve. The response from almost all markets was immediate. The after-shocks on Thursday were much harder to predict.
Stocks and bonds appear to have had a one-off adjustment to the news that the Fed would try to push down long-term rates by buying Treasury bonds. Once these markets had had the chance to react to the news, they quietened down swiftly.
In currencies, however, the shocks continued on Thursday and developed their own momentum. Wednesday’s fall of 3.01 per cent for the dollar was the greatest, on a trade-weighted basis, since the signing of the Plaza accord in September 1985.
Thursday’s fall, by the end of the trading day in London, was also very severe: about 1.9 per cent, according to Bloomberg.
The dollar had rallied since last summer largely on the perverse effects of “deleveraging”, as investors paying down debts often sold assets outside the US and bought dollars. The dollar’s renewed fall suggests that traders are testing to see how far it can fall.
With the dollar suddenly cheaper, and US goods, therefore, more competitive, other central banks have a dilemma. In the eurozone, where the European Central Bank continues to face criticism that it is “behind the curve”, beleaguered exporters could do without this month’s 10 per cent rise for the euro against the dollar.
In Japan, where the Bank of Japan has already intervened in the bond market, the question is whether it must now intervene directly to weaken the yen.
The yen is some 35 per cent stronger than it was in July 2007, at the dawn of the credit crisis.
It has gained some 6.6 per cent against the dollar in recent days. With Japanese exports in free fall, speculation that the BoJ must intervene therefore seems logical.

Copyright The Financial Times Limited 2009