Central banks need to calm disorderly FX markets

By Mike Dolan and Veronica Brown - Analysis

LONDON (Reuters) - The world's major central banks urgently need to calm wild swings in major exchange rates, the latest manifestation of a deepening global financial crisis and one which has sent the U.S. dollar and Japanese yen soaring against European and emerging markets currencies.

Foreign exchange analysts said extreme currency volatility, which has seen moves of a staggering 10 percent on some major rates on Friday alone, could see the Group of Seven or 20 top central banks intervening soon to stabilise world markets.

Japan's yen soared on Friday against the dollar and euro and one-month implied volatility rates on the dollar/yen exchange rate surged more than 20 percentage points to almost 45 percent, prompting Japanese Vice Finance Minister Kazuyuki Sugimoto to warn against such rapid and excessive currency moves.

As global investors grow fearful of a world recession and intense financial stress, they are cutting cross-border investments everywhere and repatriating money. Japan's huge external surpluses buoy its yen in that environment.

What is more, central bank interest rates everywhere are expected to fall sharply soon to offset the world slowdown and currencies supported by relatively high nominal interest rates now are suffering disproportionately from the speculation.

ING's chief FX strategist Chris Turner said currency volatility over the last two months had, to a large extent, been a symptom, not a cause, of the global financial crisis.

But he added that this week's spike in volatility now seemed to be exacerbating global asset market declines.

"G7 central banks may need to exercise their mandate of ensuring orderly FX markets by intervening in FX markets," Turner said, adding it could come as soon as today.