Word: dollarization
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Dates: during 1980-1989
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...dollar continued to slip even though foreign governments spent almost + $100 billion during 1987 to prop up the currency. By late December the dollar went into a nose dive. Unbeknown to most traders, though, the central bankers were quietly baiting a so-called bear trap, in which they aimed to punish speculators who had been reaping profits by consistently betting on the dollar's downfall. They secretly agreed to launch a dollar-buying binge when the currency hit a floor price, possibly at 120 yen. At first only the Bank of Japan came to the rescue. Then all at once...
...amount the governments spent on their intervention, an estimated $6 billion last week, is dwarfed by the total amount of dollar trading, some $150 billion, that swirls through the currency markets each day. But the central banks can move the market because of their resolute purpose; they hold on to their purchases, even at a loss, while speculators constantly churn their holdings. Moreover, last week's intervention was far more aggressive and flamboyant than usual. The Fed, which generally makes orders in $10 million batches, was trading marks for dollars in king-size packages of $25 million. Normally...
...central banks handily accomplished their short-term goal. "They have sent a message: It is no longer a sure thing to bet against the dollar," says Robert Hormats, vice chairman of the Goldman, Sachs International investment firm. Intervention, however, can be used only for fine tuning a currency's general direction. Too much intervening can disrupt a country's domestic economy. West Germany in particular is getting weary of issuing so much of its own currency to trade for dollars, a process that can lead to inflation...
...only way to stabilize the drooping dollar over the long term is through fundamental economic changes, notably by reducing the federal budget deficit. Without such measures, the Fed may eventually be forced to support the dollar by putting upward pressure on U.S. interest rates. But that step presents a painful election-year dilemma for Fed Chairman Alan Greenspan, particularly in the wake of October's stock crash, since any rise in interest rates might send the U.S. and world economies into a recession...
...next turning point may come this Friday, when the Government releases the U.S. trade-deficit figure for November. If the deficit shrinks from October's $17.6 billion to $15 billion or less, the financial markets are likely to take this as evidence that the dollar has fallen enough to begin remedying the problem. But if the gap remains wide, the beleaguered dollar may need an even more costly rescue mission...