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FX research: Beware the central bankers

BNP Paribas argues coordinated action to support the dollar can work.

A straw poll of a couple of big foreign exchange market participants found that about one-third of them believe there will soon be concerted central bank intervention to support the dollar. And the majority of them believe the chances will increase if there is a disorderly move in euro/dollar above 1.6000.

Perhaps those who believe there will be action have read a recent note from BNP Paribas, which the bank itself cautions is not objective research, but which is an interesting read nevertheless. The bank points out, perhaps to the disbelief of many younger traders who have never witnessed the chaos that intervention to dampen volatility can create, that concerted action can work.

Many believe that intervention does not occur these days because the market has grown far too big for it to work. The market is far larger than the periods between 1986 to 1988 and 1992 to 1996 when intervention almost became the norm. According to a research note published by the Bank for International Settlements in Basle (BIS Papers No 10, Central bank intervention and market expectations, Gabriele Galati and Will Melick, April 2002), the central banks intervened in dollar/Deutschmark on 87 days in the period 1986 to 1988.

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