(Reuters) – Top economists at the International Monetary Fund said on Friday that countries should avoid spending scarce foreign exchange reserves to intervene to support currencies weakening as a result of economic fundamentals such as interest rate differentials.
Instead, their focus should be on appropriate policy adjustments, Gita Gopinath, first deputy managing director of the International Monetary Fund and economic advisor Pierre-Olivier Gorinchas wrote in a blog post.
“Specifically, foreign exchange intervention should not be a substitute for justifiable adjustment of macroeconomic policies,” the two wrote as global financial officials gathered in Washington for the annual meetings of the International Monetary Fund and World Bank.
“There is a role for intervention on a temporary basis when currency movements significantly increase financial stability risks 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. The US currency index has risen against a basket of major trading partners by about 18% since the beginning of the year. The Japanese yen, for example, is down 22% against the dollar this year.
Economists at the International Monetary Fund have said that economic fundamentals are the main factor in the dollar’s rise: the rapid rise in US interest rates and more favorable terms of trade – higher prices for US exports than imports – due to higher energy prices.
โIn fighting the historic increase in inflation, the Federal Reserve has embarked on a path of rapid interest rate tightening. The European Central Bank, while also facing widespread inflation, has signaled a shallow path to its policy rates, out of concern that the energy crisis will cause an economic downturn,โ they said. “.
Meanwhile, low inflation in Japan and China has allowed their central banks to resist the trend of global tightening.
The appropriate response in most cases, Gopinath and Gorinchas said, is to allow exchange rates to adjust to a stronger dollar while using monetary policy to keep inflation close to its target, along with some fiscal support for the most vulnerable.
โAlthough central banks in emerging markets have hoarded dollar reserves in recent years, reflecting lessons learned from past crises, these reserves are limited and should be used wisely,โ the IMF economists wrote.
