Volatility Forces Central Banks

The currency market experienced large swings in the morning amid sharp volatility prompted by heightened risk aversion to fears of a widespread credit crunch. The yen continued to benefit from such wariness, rallying across the board to 117.24 against the dollar and 160 versus the euro. Those gains were short-lived as the Fed announced that it would intervene by injecting funds “to facilitate the orderly function of financial markets”. The Fed’s decision follows similar liquidity injections from the ECB, initiated yesterday and several Asian central banks including the Bank of Japan.
The Fed intervened three times today, amounting to nearly $38 billion in fund injections -- its largest since September 14, 2001, and said it would provide reserves as necessary. The Fed’s move momentarily quelled fears of a credit crunch as markets stemmed earlier losses and the yen reversed its gains against the majors. Currency traders will continue to focus on developments with the subprime debacle and exhibit greater wariness to carry trade volatility.