View from City Road: Central banks make a show of getting tough

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The forces of financial law and order, in the shape of the world's central banks, have at last stepped in to exchange fire with currency speculators in a battle to stop the dollar's sharp decline against the mark and yen.

They spent billions of marks and yen yesterday on a support-buying operation for the beleaguered US currency. So far, however, it does not look as though they have done nearly enough to deliver the markets from their present trauma.

Alarmed by the sound of gun shots on the foreign exchanges, dealers in share and bond markets around the world raced for cover.

They know that central bank intervention on its own is rarely an enduring success unless it is backed by other more concrete policy measures such as higher official interest rates.

Many dealers in the currency markets are also not yet convinced that Germany and the US are really willing to defend the dollar to the last. After all, a weak dollar may help the US to wring concessions from Japan in the trade talks. It might also help Germany to keep inflation low by holding down the price of imports.

Swiss Bank argues that a half-point rise in US interest rates would need to be combined with simultaneous cuts in German and Japanese rates really to do the trick. Next month's Naples summit of the Group of Seven top industrialised nations would also have to agree to restrain US growth and boost demand in Germany and Japan. A combination of measures as virtuous as this is about as likely as a month of Sundays. As long as the dollar remains weak, there is not much solace for investors in bonds and equities.

The dollar's weakness is only the latest fad explanation for the vicious bear market, joining looming inflation and high government borrowing as proximate causes. The only consolation is that the fall in the bond markets, which are dragging share prices down with them, is still being driven by futures activity, with institutional players staying on the sidelines.

Eventually pension funds and life assurance companies will call the futures markets' bluff. Bonds are now very close to the level at which institutional investors find them attractive. Thursday's White Paper proposals on pension fund solvency ratios are not expected in themselves to provoke a mass exodus from equities into bonds. But those pension schemes that are becoming increasingly mature, unlike their younger colleagues, need fixed interest assets rather than equities to match their liabilities to pensioners.

Pension funds bought pounds 3.3bn of gilts in the first quarter - more than for the whole of 1993 - as yields rose back to levels suitable for funding pension benefits. There is more of this buying to come. However, a fully- fledged turn in sentiment is unlikely while the shoot-out between currency speculators and central banks continues. Yesterday's further sickening downward lurch in bonds and equities is probably not the end of it.