Dollar Slides to 7-Month Low Against the Resurgent Yen

The dollar hit a seven-month low against the Japanese yen Tuesday, extending a trend that experts say stems more from Japan’s economic recovery than any fundamental weakness in the U.S. currency.

The dollar has also faltered in recent weeks against the euro, the European common currency, as the European economy has gathered steam.

If the trend continues, the dollar’s weakness could help boost U.S. exports at a time when the nation is running record trade deficits.

But the strength in the yen, which has gained nearly 12% against the dollar in the last two months, alarms Japanese officials because a strong yen makes Japanese exports costlier to Americans and other foreign consumers.

The dollar fell as low as 109.06 yen in trading Tuesday before recovering to 109.59. It was the first time that the dollar has fallen below 110 yen since January and it approached the low for the year of 108.22 yen, reached Jan. 12. The euro rose to $1.058 from $1.046.

At some point, analysts expect the Bank of Japan to intervene in the currency markets to try to restrain the yen, but they doubt it will happen before the dollar falls through the 108-yen level, which would also mark a new three-year low.

The Japanese would welcome American assistance in weakening the yen, but U.S. officials so far have been content to let the markets decide where the dollar-yen balance should lie.

“From the point of view of Japan, a move much below 109 [yen] would probably trigger intervention” by Japan, Bruce Steinberg, chief economist at Merrill Lynch, said Tuesday. Other analysts said they could envision a drop to 105 yen or even lower before the Bank of Japan took action.

Although a weakening dollar can fuel U.S. inflation by pushing up the prices of imports, it also makes U.S. exports cheaper and could help moderate the record trade deficits that the country has been running in recent months.

Of course, U.S. consumers could keep the deficit imbalance intact if they ignore rising import prices and continue on their blistering spending spree.

The U.S. trade deficit in goods and services reached a record $24.6 billion in June, the most recent figure released by the Commerce Department. The nation appears on course to exceed last year’s record annual deficit of $164 billion.

The recent slide of the dollar from about 122 yen began, coincidentally, at almost the exact moment when Lawrence H. Summers succeeded Robert E. Rubin as Treasury secretary July 2.

The last time U.S. officials intervened in currency markets was about a year ago, when the dollar was trading at an eight-year high of over 147 yen. At that time, the U.S. acted to support the foundering yen.

It has been far longer since the U.S. government has acted to prop up the dollar and, with the domestic economy still strong, intervention seems unlikely now, according to Zhaohui “Harvey” Chen, a currency analyst at Chase Manhattan Bank.

Rather than any particular dollar-yen exchange rate, what would more likely prompt U.S. intervention would be a plunge in the U.S. stock or bond markets, Chen said.

Absent such a market shock, the dollar will likely firm up on its own, he said. The currency markets tend to overshoot the signals they get from the economy, Chen said, adding that any further drop in the dollar against the yen is unwarranted by Japan’s nascent economic recovery.

William Quan, senior market economist with Aubrey G. Lanston & Co., said that if the Japanese government is truly interested in extending Japan’s economic recovery, rather than simply protecting its exporters’ market share, it ought to be happy with the yen’s strength.

A stronger yen delivers more buying power to Japanese consumers, and a rebound in consumer spending is key to sustaining economic growth, he said, adding that consumer confidence in Japan has been in the doldrums for years.

There is little chance that the dollar’s weakness will last through the end of the year, analysts said, since investor fears about the year 2000 computer problem are focused mainly in foreign countries, including Japan. Because the U.S. is generally thought to have done the best job of addressing potential Y2K disruptions, American markets--particularly the U.S. Treasury securities market--probably will be the beneficiary of fourth-quarter investments by foreigners seeking a safe haven, experts said.

Because you have to buy dollars to invest in U.S. markets, they say the result will be a strengthening of the dollar as the New Year approaches.

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Falling Greenback

How many yen a dollar would buy, daily closes:

Tuesday: 109.59

Source: Bridge Information Systems