Crescenzi: Paulson's Subtle Intervention Shift

In an interview minutes ago with Steve Liesman on CNBC, U.S. Treasury Secretary Hank Paulson said that he would never take foreign exchange intervention off the table. With respect to the intervention question Paulson has said that currency values should be set in the markets based on underlying fundamentals.

This hence represents a subtle shift, although it may have been the astute form of questioning from Liesman, whose question was an excellent lure into obtaining a truthful answer with respect to the intervention question and left Paulson little wiggle room to use his standard comebacks to duck the question.

Paulson arguably has missed a number of chances to intervene over the past two months, particularly since the G-7 meeting on April 11th, which the French finance minister described as on equal footing with the monumental 1985 Plaza Accord. The best time to intervene, as was shown by Treasury Secretary Robert Rubin, is when the currency market is already moving in the desire direction.

This is the best way to bring speculators closer to their pain threshold and keep them honest, so to speak.

Here are facts from the Treasury department on interventions from 1993-2000 period, the last year in which there was any intervention by Treasury in the currency markets:

In the 1993-2000 period, there were fewer, but larger interventions.

There was intervention on 20 days during this period, always in conjunction with at least one other member of the G-7, but only two of these operations took place after August 1995. In the period April 1993 - November 1994, the ESF sold foreign currencies on a number of occasions. The dollar reached historical lows vs. the DM and the yen in March and April 1995 respectively. The US monetary authorities sold foreign currencies on four days from March through May. The May intervention was explicitly linked to the G-7's April 25 statement of "concern about recent developments in exchange markets ... that recent movements have gone beyond the levels justified by underlying economic conditions in the major countries ... [and] that orderly reversal of those movements is desirable ..."

There were further sales of foreign currencies in July and August. In June 1998, the ESF entered the market as a buyer of foreign currency for the first time in six years and purchased yen in the context of Japan's plans to strengthen its economy. In September 2000, the ESF bought euros, in a coordinated intervention at the initiative of the ECB, on shared concern about the potential implications of euro movements for the world economy.

You can read more of the Treasury intervention history here.

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Tony Crescenzi is the Chief Bond Market Strategist at Miller Tabak + Co., LLC where he advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. Crescenzi makes regular appearances on financial television stations such as CNBC and Bloomberg, and is frequently quoted across the news media. He is also the co-author of the just-revised "The Money Market" and "The Strategic Bond Investor."