Currency market in turmoil as inflation wreaks havoc across the globe

Financial markets fluctuated wildly yesterday as central banks around the world struggled to find a path through soaring inflation and a rampant dollar.

Interest rates have been raised from London and Washington to Zurich and Stockholm to contain rising prices – with US aggression pushing the dollar soar.

That led to a rare intervention by the Bank of Japan in foreign exchange markets yesterday – the first since 1998 – when it intervened to buy up the battered yen.

The move came after the US Federal Reserve raised interest rates by three-quarters of a percentage point for the third meeting in a row this week, signaling more to come.

Hours later, the Bank of Japan dropped its key interest rate below zero, and the yen fell to its 24-year low against the dollar.

That pushed Japan to back its currency by using its dollar reserves to buy the yen, pushing the crunching currency up more than 2 percent.

Prime Minister Fumio Kishida said the government will “take necessary steps to respond to excessive fluctuations,” but experts have expressed doubts about the strategy.

It was the latest example of the pressure being exerted on the financial world by the frenzy of the dollar.

The yen has fallen 19 percent against the dollar this year, while the pound plunged 17 percent and the euro plunged 13 percent.

Yesterday sterling – already close to its 37-year low – was back on the rack. It plunged below $1.13 after the Bank of England raised its key interest rate by 0.5 percentage points. British bonds, meanwhile, suffered their biggest sell-off since March 2020.

Falling demand for bonds – government debt parcels – is driving up the returns sought by investors and making public sector borrowing more expensive.

Bank of England divided over rate hikes

Through LUCY WHITE

A deep rift has arisen at the Bank of England over how best to handle red-hot inflation.

A three-way split in the nine-member Monetary Policy Committee (MPC) emerged as officials disagreed on how much interest rates should rise.

Five policymakers, including Governor Andrew Bailey, opted for an increase of 0.5 percentage point, bringing the interest rate to 2.25 percent.

Deep rift: MPC members Catherine Mann (right) and Swati Dhingra (left)

Three, including Catherine Mann, supported a more aggressive move of 0.75 percentage points. And new member Swati Dhingra voted for a 0.25 percentage point increase.

The Bank has raised interest rates at an unprecedented pace since December to get a grip on inflation.

But it has been criticized for not doing enough, as inflation rose to a 40-year high of 10.1 percent in July and declined to 9.9 percent in August.

In many quarters, the Bank was expected to raise interest rates by 0.75 percentage points following large increases by the US Federal Reserve and European Central Bank this month.

Andrew Sentance, a former MPC member, said the committee dodged a 0.75 rise and chose a soft option instead.

An official bank rate of 2.25 per cent will not curb UK inflation if it is around 10 per cent. It is a shame that the MPC does not understand this fundamental fact,” he said.

Julian Jessop, an economic fellow at think tank the Institute of Economic Affairs, said it was “another missed opportunity to regain credibility.”

He noted that the Bank was planning to reverse its massive pandemic-era money printing program by paying off a number of government bonds.

The MPC said it would sell back £80bn to investors over the next 12 months, bringing the total on its books down to £758bn.

Equity markets also endured a volatile session, with the FTSE 100 in London moving sharply higher, closing 1.1 percent lower. Paris and Frankfurt fell by almost 2 percent. A super strong dollar is causing serious imbalances for the global economy.

Commodities such as oil that are priced in dollars become more expensive and countries with dollar-denominated debt find it more difficult to maintain them.

But intervention in markets is controversial and earlier this year US Treasury Secretary Janet Yellen said it was only justified in “rare and exceptional circumstances”.

Deutsche Bank analysts questioned Japan’s strategy, saying the reserves needed “could become unaffordable very quickly.”

In Britain, the Bank of England notoriously intervened to defend the pound during an ugly sell-off of the currency in 1992.

Seven years earlier, there was concerted action to weaken the super strong dollar. There has been no repeat of that deal, known as the Plaza Accord.

Jane Foley, head of FX strategy at Rabobank, said such an agreement was unlikely until the Fed is confident inflation is under control. “However, whether we need one is completely different,” she added.