Avoid FX Interventions If Currency Weakness Is Due To Fundamentals, IMF Economists Say


Oct 14 (Reuters) – Countries should avoid spending their meager foreign exchange reserves to prop up currencies that are weakening due to economic fundamentals such as interest rate differentials, top economists at the International Monetary Fund said on Friday. .

Instead, they should focus on appropriate policy adjustments, IMF first deputy managing director Gita Gopinath and economic adviser Pierre-Olivier Gourinchas wrote in a published blog post.

“Specifically, foreign exchange intervention should not be a substitute for justified adjustment of macroeconomic policies,” the pair wrote as global finance officials gathered in Washington for the annual meetings of the IMF and World Bank. .

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“There is a role to play in temporarily intervening when currency movements significantly increase risks to financial stability and/or significantly disrupt the central bank’s ability to maintain price stability,” they added.

Most countries have seen their currencies fall against the dollar this year. A greenback index against a basket of major trading partners is up nearly 18% year-to-date; the Japanese yen, for its part, is down 22% against the dollar this year.

IMF economists have said that economic fundamentals are the main driver of the dollar’s rise: a rapid rise in US interest rates and more favorable terms of trade – higher US export prices relative to its imports – caused by rising energy prices.

“Fighting a historic rise in inflation, the Federal Reserve embarked on a course of rapid policy interest rate tightening. The European Central Bank, while also facing widespread inflation, signaled a trajectory shallower for its key rates, fearing that the energy crisis will lead to an economic slowdown,” they wrote.

Meanwhile, low inflation in Japan and China allowed their central banks to counter the global tightening trend.

Gopinath and Gourinchas said the appropriate response in most cases is to allow exchange rates to adjust to the stronger dollar while using monetary policy to keep inflation close to its target, as well as some budget support for the most vulnerable.

“Although central banks in emerging markets have accumulated dollar reserves in recent years, reflecting lessons learned from previous crises, these reserves are limited and should be used with caution,” the IMF economists wrote.

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Reporting by Dan Burns and David Lawder; Editing by Simon Cameron-Moore

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