Courtesy of Mish.
Currency madness has spread to the Czech Republic. Central bank intervention triggered a record plunge in the Koruna vs. the Euro.
Bloomberg reports Czechs Play Koruna Hardball as Intervention Triggers Record Drop
The Czech central bank’s return to currency interventions after 11 years heralds a push for a weaker koruna to ward off deflation and kick-start the economy.
The koruna plunged 4.4 percent to 26.982 against the euro yesterday, its biggest-ever drop and the most in the world on the day, after the central bank sold the currency in the foreign-exchange market. Governor Miroslav Singer pledged to keep intervening “for as long as needed” to spur inflation, setting a target of “near” 27 per euro, a level the koruna last traded at in 2009.
“The central bank signaled willingness to play hardball in its foreign-exchange policy,” Luis Costa, an emerging-market strategist at Citigroup Inc., said by e-mail from London. “For the moment, I believe the ‘ideal level of 27’ will be met.”
Unlike interventions aimed at strengthening the exchange rate, which require sales of foreign currencies that can deplete foreign reserves, the Czech central bank is printing more koruna to drive down its value. The money supply increase may lead to the higher inflation rates that Singer is pursuing.
“The power is unlimited,” Guillaume Tresca, a Paris-based strategist at Credit Agricole SA, wrote by e-mail yesterday. “They can theoretically print as much koruna as they want.”
Hardball in Pictures – Koruna vs. Euro
It seems the “ideal” level of 27 was reached in a day. Of course it is preposterous to propose that anyone, especially central banks have any notion of what the “ideal” level is.
From a consumer standpoint, the more European goods Czech citizens can buy with the Koruna the better. But central banks will have none of that.
About That Eurozone Entry
Wikipedia comments on the Czech Republic Plans to Join the Eurozone.
The Czech Republic planned to adopt the euro in 2012, but its government suspended that plan in 2007. Although the country is economically well positioned to adopt the euro, there is considerable opposition to the move within the Czech Republic. According to a survey conducted in January 2011, only 22% of the Czech population was in favour of replacing the koruna with euro.
One alleged disadvantage of joining the eurozone is giving up the ability to do what the Czech Republic just did.
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