Time Is Ripe for Dollar Intervention: Strategist
An intervention to prop up the U.S. dollar is very likely if the greenback's slide continues, as U.S. policymakers' attitude towards a weak currency has shifted dramatically over the past year, Hans Redeker, global head of foreign exchange at BNP Paribas, told "Squawk Box Europe" on Monday.
Despite verbally supporting a strong dollar, U.S. authorities had preferred a softer currency over the past years to rein in a widening trade deficit, but with inflation on the rise this is not an option anymore, Redeker said.
"We are going to see intervention in the dollar when we see the first undershoot in the dollar," Redeker said. "Inflation expectations are undermining the bond market and impose a risk premium on the long end of the market."
A bailout for Fannie Mae and Freddie Mac, whose share have been hammered recently because of fears over their ability to raise capital, would contribute to more selling of the greenback, analysts said earlier.
"A bailout of these two institutions could have significant ramifications, further ramifications for a deterioration of the dollar, you may even draw in some questions in regards to sovereign debt downgrades, it's going to cost that much," Manus Cranny from MF Global told CNBC Friday.
The dollar bounced on Monday after the government announced measures to help the two government-sponsored mortgage financers but investors are still looking to see whether the steps are enough to ensure the health of Fannie and Freddie.
Intervention on the greenback is likely to be a coordinated effort by global central banks as 25 percent of US dollar assets are held abroad and central banks around the globe have bought around 250 billion euros ($395 billion) over the past year, Redeker said.
"Dollar stability all of a sudden requires action and has advantages if it is implemented," he added. "The US dollar weakness acted as an accelerator of the global inflation pressures."