Actions speak louder than words. The move by the three major international central banks into the foreign exchange markets was a significant concerted policy initiative to support the beleagured euro. It is likely to be followed today by a strong statement of confidence in the currency by the finance ministers of the big industrial nations, who are meeting in Prague ahead of the annual meetings of the International Monetary Fund and the World Bank. Then, the ministers and central bankers will hold their breath and wait for the verdict of the financial markets next week. Further intervention is possible.
The euro ended a couple of cents stronger last night, holding just above 88 cents, having topped 90 cents at one stage. However, the success or otherwise of the move to support the currency - initiated a fortnight ago by a decision of the EU finance ministers - will only be evident in the months ahead. At worst, the move should succeed in setting a floor under the euro's value, ensuring it does not plunge towards 80 cents. At best, if the central bankers have timed their intervention correctly, we may start to see a gradual but sustained recovery in the currency's value.
The timing of yesterday's move in which the European Central Bank, the US Federal Reserve Board and the Bank of Japan sold dollars and bought euros in the market was astute. Market analysts had been looking to the weekend meeting of the Group of Seven (G7) finance ministers to articulate the view of policy-makers on the currency's prospects. By moving in ahead of the meeting the central banks took the markets unawares. But they will know that a battle of wills may lie ahead, as investors test the commitment of the central banks to pushing the euro higher.
The move by the central banks has raised the stakes, and a period of some volatility on the currency markets may lie ahead. Investors and analysts will be parsing every paragraph in the statement from today's G7 finance ministers' meeting. In particular, the markets will now be asking whether the US Federal Reserve is committed to the euro support effort. The US Treasury Secretary, Mr Larry Summers, sent out a mixed signal yesterday, saying that support for a strong US dollar remained the administration's policy. Investors may decide to test the will of the Fed and of the ECB in the weeks ahead.
Longer-term trends remain central to the outlook for the currency. The euro has been weak mainly because investment has been flowing into the US equity market and the US economy. This will only reverse when confidence starts to build in the outlook for the main euro zone economies.
There is a strong argument that, in the light of fundamental economic trends - and some emerging doubts about the US economy and its equity market - the euro is seriously undervalued. The intervention by the major central banks and today's statement by the G7 are likely to lead to an intense examination of whether this is, in fact, the case. If it leads to a gentle but sustained recovery in the euro's value, then the outlook for inflation here will improve significantly. And if the decision by the Clinton administration to release oil onto the market from its strategic reserves helps to bring down crude prices, then the prospects for a fall in the inflation rate in the months ahead will be further improved.