It never pays to intervene in the currency markets

To intervene or not to intervene? That is the question facing Western finance ministers and central bank governors assembled in Prague for the annual meeting of the International Monetary Fund and the World Bank, as - in the face of the by now routine anti-globalisation riots - they wonder how to bring down the price of oil and push up the value of the euro. Their inclination is to intervene. That inclination is surely wrong.

To intervene or not to intervene? That is the question facing Western finance ministers and central bank governors assembled in Prague for the annual meeting of the International Monetary Fund and the World Bank, as - in the face of the by now routine anti-globalisation riots - they wonder how to bring down the price of oil and push up the value of the euro. Their inclination is to intervene. That inclination is surely wrong.

Intervening in markets is less science than art, requiring the subtlest judgement and perfect timing. Intervention will work in the short term if it pricks a speculative bubble. In the longer term, however, it can only be successful if it catches an underlying dynamic of the market. But to intervene against the overwhelming market tide, as John Major's government so expensively learnt on Black Wednesday, is futile.

The euro satisfies neither of these conditions. Only in the tiniest degree are speculators responsible for its current plight, which reflects an exodus of longer-term, mostly investment capital to the US. That outflow is primarily due to the belief that America's growth prospects are better than those in Europe. Small wonder that the single currency is back close to its levels before the concerted intervention by the major central banks last Friday. The markets are simply unconvinced.

Oil is a slightly different story. Bold talk and modest intervention may indeed combine to propel its price lower. For one thing, and especially after Opec's recent production increases, there is no global shortage of crude oil.

The fuel squeeze to which President Clinton has responded by releasing 30m barrels from America's strategic oil reserve is mainly the result of a lack of refining capacity. Whether Mr Clinton is acting to assist Al Gore's campaign for the White House is beside the point. This particular intervention may well do the trick - particularly if the EU follows the US example and sells off some of its own emergency stockpiles.

Whether today's oil price is too high is a matter of opinion, but everyone knows that in the medium term it will fall. Only 21 months ago, oil was costing less than $10 a barrel; there is no reason to suppose that, like every previous oil price surge, this one will be followed by a plunge, though it may take some months. To prop up the euro is futile; to intervene to push down the oil price may be pushing on an open door.

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