G7 Intervention And The Euro: The Rumours Fly

LONDON--Was there a leak, or wasn’t there? That is the question still intriguing dealers a full week after the first concerted effort by G7 central banks to support the euro.

There is no doubt that there was heavy buying in the market on Thursday September 21, and the following Friday morning before the central banks started their concerted effort at 11.05am, GMT.

Reuters, the first wire to carry the news, reported the intervention at 11.15am.

Later last week, a leading German newspaper, the Frankfurter Allgemeine Zeitung, reported rumours among Frankfurt dealers that the G7 plans had been leaked by one non-eurozone central bank and that a leading hedge fund had bought euros in size through a US bank ahead of the intervention, which was co-ordinated by the European Central Bank (ECB).

The ECB has refused to comment on the story.

The heavy euro buying started in New York trading on the afternoon of Thursday, September 21. At that time, the market was certainly speculating that last weekend’s scheduled G7 meeting could result in the first co-ordinated support for the euro since its creation in January 1999. That night, the euro closed at 0.8614 against the dollar in London, up from 0.8491 at the start of day.

On Friday morning (September 22) heavy euro buying continued in European trading. The central banks stepped in with purchases of, collectively, around E5 billion over the two hours, according to figures compiled by economic research consultancy 4Cast from data released by the US Federal Reserve, and other central banks.

There is no general agreement among FX dealers that there was a deliberate leak. "It is logical that some major banks would have been buying simply to cover short positions ahead of the G7 meeting," says one leading analyst.

But Dave Gilmore, analyst and partner at FX Analytics in Greenwich, Connecticut, thinks something more suspicious was afoot.

"Given how timid the FX market has become in the last year, moves of the magnitude we saw in the euro on Friday command attention. And there was nothing on the wires to generate this response apart from a broader euro bid that began Thursday with the drop in oil prices," he says.

Another FX trader in London says the market was full of rumours that one huge liquidity-providing bank was buying euros on behalf of a US hedge fund.

"We were hit in size time and time again," says the trader. "We heard that there was a hedge fund wanting euros."

A number of traders have reported that Citigroup was a big buyer of euros on September 22. But Citigroup vehemently denies it had any idea of the impending intervention. "We do not comment on individual client transactions," says a spokesman at Citigroup in London.

"No individual at Citigroup had advance knowledge of last week’s intervention in the euro market," says the spokesman.

Professional market-watchers rule out any kind of deliberate leak by one of the central banks involved.

The only benefit to them of such a leak would be to push the value of the euro up, reducing the amount G7 banks had to spend on rallying the value of the currency, but: "Only the most cynical would buy this explanation," says FX Analytics’ Gilmore.

Gilmore does not completely discount the possibility of a accidental leak. It is estimated that as many as 70 officials would have been directly involved in the coordination of the seven central banks’ intervention.