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Saturday, July 28, 2007

Forint Down on the Week

The Hungarian forint was the worst performer against the euro last week - falling by 2% - this was its biggest weekly drop in 10 months. I don't have a lot more to say about this at this point, or perhaps it is more prudent to say nothing. We await next week to see what happens.

The forint was the worst performer against the euro over the past five days, sliding more than 2 percent, as the NTX Index of stocks in central Europe's 30 largest companies declined the most in a week since March. Investors reversed trades where they'd bought the forint to take advantage of Hungary's 7.75 percent interest rate, also sending the currency tumbling.

``The sell-off does not seem likely to stop soon; I think central and eastern European currencies may fall further,'' said Agata Urbanska, European emerging markets economist at ING Bank NV in London.

Against the euro, the forint dropped to 252.07 by 4 p.m. in Budapest, after earlier touching a more than six-week low of 253.82, from 246.06 a week ago. Urbanska predicted Hungary's currency could weaken to 256 per euro.

The currency also posted its biggest weekly drop this year versus the dollar, to 184.550 from 177.962 July 20.

Of course you could take the view that the National Bank of Hungary were very perspicacious in not lowering rates earlier in the week - not precipitating a stampede, etc - but equally they were simply being cautious. Either way, in the short term well done, although this still leaves the issue of what to do about lack of export competitiveness and falling domestic demand to think about. This is the whole point about Krugman's old eternal triangle idea.

"The essence of the dilemma may be understood by remembering the catechism first suggested by the Bellagio Group, the famous official-academic international talk shop that flourished in the 1960s. In the world according to Bellagio, the problem of choosing an international monetary regime could be summarized as the effort to achieve Adjustment, Confidence, and Liquidity. Exactly what these terms mean is somewhat in the eye of the beholder; but my version goes as follows. Adjustment means the ability to pursue macroeconomic stabilization policies - to fight the business cycle. Confidence means the ability to protect exchange rates from destabilizing speculation, including currency crises. Liquidity basically means short-term capital mobility, both to finance trade and to allow temporary trade imbalances. So what is the dilemma of international financial architecture? It is that, essentially because of the threat of currency speculation, you can't get everything you want. More specifically, insisting on having any one of the three desired attributes in an international regime forces the abandonment of one of the others. As a result, there is a limited menu of possible regimes - and each item on that menu is unsatisfactory in some important way."

Simply put, the dilema runs as follows:

"The current situation is unacceptable, and everyone knows that something has to give; but the policy ideas that the community of respectable opinion can allow itself to discuss are at best marginal, at worst irrelevant."

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