Currency Interventions Are an 'Unwinnable War': Analysts
International intervention in foreign exchange markets may only give brief respite to countries that are fighting an "unwinnable war" against currency appreciation, analysts told CNBC.com.
The finance ministers and central bank governors of the Group of Seven industrialized nations (G7) released a statement before Asian markets opened on Monday, saying that they were prepared "to take all necessary measures to support financial stability and growth."
"We are committed to taking coordinated action where needed, to ensuring liquidity, and to supporting financial market functioning, financial stability and economic growth," the statement said, adding that the G7 had discussed its shared interest in market-determined exchange rates.
"Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability. We will consult closely in regard to actions in exchange markets and will cooperate as appropriate," it read.
For the past few weeks, governments facing currency appreciation – notably Japan and Switzerland -have been fighting a losing battle alone.
On August 3, the Japanese Ministry of Finance intervened in the currency market in an attempt to stem the rise of the yen. The Bank of Japan has been supporting the action by injecting liquidity into the financial system. The action's effectiveness was short-lived, analysts said, but on Monday the government signalled that it would continue with its interventions.
"I think their aim by doing was to warn investors not to just be short dollar/yen, because some of these people who were short dollar/yen have lost 3 percent in one day. So clearly what they hoped to do was change market behavior," Thomas Harr, head of Asian FX Strategy at Standard Chartered, told CNBC.com. "The problem with intervention is that it's normally most successful the first time. When they have to do it again and again and the market just sees it as better levels to buy dollar/yen."
The problem for policymakers in Japan, and in other countries which have currencies that are viewed as safe havens, is that most of the dynamics driving buyers are outside of their control.
Dollar weakness and the ongoing softness in developing market economies are the principal cause of appreciation, and without coordinated global action, there is little hope of any individual country finding a meaningful resolution, David Bloom, head of FX strategy at HSBC told CNBC.com.
"Unilateral intervention is an unwinnable war," Bloom said. "What you really need is QE3 in the US, QE2 in the UK, the ECB to be buying bonds, European governments to be buying banking stocks, the Japanese to intervene, the Turks, the Brazilians, the Swiss, all to come in and say 'this is what we decide to do,' and bang, to smash the market."
Only a month ago, with the second round of quantitative easing in the US coming to an end, markets were looking for signs of light at the end of the tunnel, Bloom said. With mounting sovereign debt problems on both sides of the Atlantic, this looks like wishful thinking.
"Somewhere, we were talking about exit policies and the end. Now we feel we're bang in the middle of the crisis. The whole timeframe of how the crisis works has been changed. You have to break that mentality. These piecemeal maneuvers aren't going to do it," Bloom said.
The G7's statement is likely to turn into an intervention at some stage, Morgan McDonnell, head of foreign exchange at RBC Dexia, told CNBC.com.
"I think they've given us a clear indication that they want us to believe that, even though it is small in size," he said. "The intervention in itself isn't really working, and it costs an awful lot of money, but I think the impression out there that it's going to happen buys you significantly more time before you have to pull the trigger."
Whether it will "smash" market sentiment is a different matter.
"I don't think it will work. I think it will stop the huge flows and buy time. I think this is a time game, I don't think it will actually change the sentiment in the market," McDonnell said.
Japanese policymakers have been pushing for global action on currency fluctuations, but have stopped short of actually calling for coordinated intervention.
In a research note released on Monday, Simon Derrick, FX strategist at Bank of New York Mellon, said that the G7's statement did not signal that multilateral intervention is imminent. "It was a tacit nod to Japan to extend its current campaign if it so wished and that support would be forthcoming if required."
The G7 last intervened in support of Japan in March, when speculative action in the wake of the country's devastating tsunami sent the yen to record highs.