Catching foreign exchange traders around the world by surprise, the governments of the United States, Japan and the European Union, joined by Canada and Great Britain, acted in concert September 22 to boost the value of the euro against the dollar and the yen. The heavy buy orders for the common European currency lifted it to more than 90 cents from its recent low of 84 cents. The action on behalf of the euro was the first time since 1995 that the world's leading central banks had simultaneously entered foreign exchange markets. The intervention also represented a break with recent White House policy. The Federal Reserve Bank of New York, acting on behalf of the Department of the Treasury, last attempted to influence a key currency in mid-1998, when it cooperated with the Bank of Japan to slow the yen's decline against the dollar (see JEI Report No. 24B, June 26, 1998).
Since being launched with great fanfare and pride in January 1999, the euro has fallen steadily against the dollar from its initial value of $1.17. Observers point to the difference in transatlantic economic fundamentals as the basic reason for the unified currency's sag. Although EU economies have grown in the last 21 months, the robust performance of the U.S. economy easily has outpaced these gains. Investors &emdash; including those in Europe &emdash; have sent their money to American shores in search of higher returns, eroding the value of the euro.
The euro's allies apparently decided for several reasons that now was the time to intervene. Although the weaker euro was helping make EU exports more competitive in world markets, it also was boosting the prices of imports, particularly crude oil. With petroleum prices hitting 10-year highs, the cost of Europe's heavy dependence on imported oil was becoming excessive in both economic and political terms. For its part, Washington was worried about the continued deterioration of the U.S. trade deficit with the continent, a gap partially attributable to the impact of the euro's fall on the pricing of European exports. Concerned that the weaker euro could give European companies a decisive edge in global trade, Tokyo joined in the intervention.
The euro's erosion also was a topic at the meeting of Group of Seven central bankers and finance ministers held September 23 in Prague, the Czech Republic and at the following day's International Monetary Fund gathering. The G-7 participants reiterated the concern over the euro's drop and warned that they would not hesitate to intervene again to halt its slide. The IMF focused on another aspect of the situation by hammering out a joint statement by oil-consuming nations and four oil producers &emdash; Algeria, Russia, Saudi Arabia and the United Arab Emirates &emdash; warning that high prices for crude threaten the health of the global economy.