The European Central Bank is unlikely to enter foreign exchange markets directly, even in the face of a more than 10% drop in the euro this year, although Japan may engage in this type of intervention if the yen continues to fall, according to Goldman Sachs Group Inc.

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(Bloomberg) – The European Central Bank is unlikely to enter foreign exchange markets directly, even in the face of a more than 10% fall in the euro this year, although Japan may get involved. in this type of intervention if the yen continues to slide, according to Goldman Sachs Group Inc.

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The U.S. dollar, fueled by a combination of aggressive Federal Reserve monetary policy and safe-haven buying, is trading near its highest level in decades, sending currencies rolling from Hungary to New Zealand. The euro and yen – the greenback’s most traded peers – have struggled to hold firm, while some countries like Chile and India have already taken direct action to support their currencies.

Still, the odds of such a move by the ECB in the near term are slim, according to Goldman currency strategist Karen Reichgott Fishman, who says Chair Christine Lagarde and her colleagues have more pressing issues to address before carrying on. their focus on supporting a common Europe. currency. Topping the list are soaring inflation, risks to energy supplies and deterioration in so-called peripheral bond markets, such as Italy’s, whose problems are exacerbated by political unrest.

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Those issues underpinned the central bank’s decision on Thursday to raise its benchmark rate by half a percentage point – its first increase in a decade – and to provide more details on its new bond market instrument, which aims to prevent a break-up of the euro zone.

“Risks of fragmentation”

“Concerns over fragmentation risks and elevated political uncertainty in Italy have finally offset initial upward pressure on the euro, underscoring the complex set of challenges currently facing the single currency,” the strategist wrote. of Goldman in a note. While FX intervention is certainly “in the toolbox”, the likelihood of the ECB deploying it is “low”, she said.

The euro fell 0.3% on Friday to $1.0194, extending this year’s decline to 10.3%.

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Meanwhile, the yen has fallen more than 16% against the greenback this year and earlier this month touched the weakest level since 1998. Bank of Japan Governor Haruhiko Kuroda on Thursday stressed his determination to stick to lower interest rates, even if it means a lower decline. currency.

How long the BOJ can resist the decline of the yen is an open question. Reichgott Fishman said that although interventions by the world’s largest central banks have been rare in recent decades – and when they do occur, they are usually coordinated – the chances of Japan doing something will increase if the dollar rate -yen continues to rise.

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