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Tuesday June 2, 2009 - 18:34:39 GMT
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Forex Blog - How Central Bank Intervention To Limit Currency Appreciation Affects The Dollar ElsewhereAs long as central banks, such as Russia and those in Asia, resist their currencies appreciating, it will exacerbate dollar weakness elsewhere. This occurs as they adjust their reserve currency baskets by selling dollars accumulated through intervention and buying other currencies, specifically euros.
This is not a new tactic as the first CB I saw doing this was the MAS in the 1970s (used to buy CHF), who was way ahead of its time, and this strategy has been going on since then. The use of and adjustment to currency baskets from interventions have increased the visibility of such tactics.
As an example, as pointed out on GVI Forex, the Russian CB has been defending the USD/RUB. The more aggressive the intervention, the more dollars it buys and thus the more euros it has to buy (i.e. sell dollars accumulated through intervention) to maintain the proportion of dollars vs. euros its reserve currency basket.
Jay Meisler, co-founder
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