How US, EU, Japan joined to stop a sliding buck

Officials from the US treasury department, Japan’s finance ministry and the European Central Bank reportedly drew up a currency contingency plan over the weekend of March 15-16, the Nikkei said, citing sources familiar with the situation.

An international financial source with knowledge of the discussions told Reuters that foreign exchange authorities from the three were in close contact at the time and discussed joint intervention if the dollar’s fall intensified.

Analysts said even though a rescue never took place, any such agreement on intervention would be important in the future if the dollar were to tumble again or other exchange rates move very sharply.

The officials did not specify levels for initiating the dollar rescue plan, but in the event of a free-fall they agreed to coordinate aggressive buying of the greenback and sell yen and euros, the newspaper said. “If downside risks to the dollar emerge from here on, the market will keep in mind the possibility of similar action by authorities,” said Takahide Nagasaki, chief foreign exchange strategist for Daiwa Securities SMBC.

Even as the dollar slid after the flare-up of the credit market turmoil last August, there had been a perception among market players that US authorities were willing to tolerate falls in the dollar in a policy of “benign neglect”, to help support US exports as the economy faltered. But market players detected a shift in US officials’ stance towards the dollar in June when Federal Reserve Chairman Ben Bernanke issued a rare warning on the Inflation risk posed by a weak dollar, and Treasury Secretary Henry Paulson declined to rule out intervening in currency markets.

Under the intervention framework, Japan was to supply yen through currency swaps. The plan also called for using a previously established swap mechanism between the United States and Europe.