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Currency Watch: Bank of Japan Intervenes to Seek Weaker Yen

The BOJ's action has been modestly successful, but the dollar has come off its strongest recent levels against the yen.
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As suggested in these reports yesterday, the Bank of Japan found it necessary to intervene in the forex market in Tokyo to buy dollars and to try to discourage traders from pushing the yen to higher levels. The dollar/yen rate was 104.80 when the intervention occurred and the dollar moved briefly to 106.25 immediately after the BOJ was seen. Soon after the rate eased back to 105.75, and it was lately at 105.50.

Finance Minister

Kiichi Miyazawa

said that the action was motivated by a desire to protect the Japanese economic recovery from disruptive currency movements. He indicated that further intervention would be possible if circumstances warranted. This is the third confirmed intervention by the BOJ this year.

The euro was little affected by the dollar's volatility. Currently the European unit trades at $0.9660 compared with last night's New York close of $0.9680.

Support for the euro is being generated by growing rumors of a 25-basis-point rise in eurozone interest rates which may be announced at Thursday's

European Central Bank

policy meeting. Opinion is fairly evenly balanced between those expecting a rate rise this week and those seeing such a move further in the future. Traders in Europe believe that such a rate increase could push the euro up by 1% or 2% at most given the entrenched resistance to buying euros which is pervasive in the forex community.

Euro/yen gained only marginally following the Tokyo market action and trades around 101.80 after closing in New York last night at 101.70.

Little impact on the euro was noted from comments by

Bank of France

Gov.

Jean-Claude Trichet

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that the 17 members of the ECB council and the all the ministers in the eurozone, believe that "the euro has significant potential to appreciate." He indicated that economic growth in the zone is expected to be above 3% this year.

Sterling remained soft in London trading despite a stronger-than-expected rise in U.K. average earnings which rose 5.9% in the three months prior to January. These data gave some support to the view that the

Bank of England's Monetary Policy Committee

might raise U.K. interest rates in the near future.

The Swiss franc firmed to SF 1.6682 while the Australian dollar eased to $0.6125. After some volatility yesterday the Canadian dollar lately was holding around $1.4650.

With stock markets weak in all major centers, forex traders will increase their focus on Wall Street today. If the U.S. equities markets are able to stage a rally this would tend to offer support to the dollar and could help to stabilize trading at current levels or higher.

Today's U.S. data on

business inventories

for January showed a 0.5% rise.

import prices

rose 1.9% and

export prices

rose 0.5%. Immediately after the numbers the dollar was trading at 105.44 yen and the euro was at $0.9660. Traders in New York indicate that the forex market is nervous with concerns over central bank intervention policy discouraging aggressive position taking.

However, BOJ actions so far have not achieved its currency management goals as the market immediately resumed selling dollar/yen from better levels after the intervention. The overriding problem is that there are substantial inflows into Japan at this time and occasional intervention is not likely to reverse these flows. To be consistent the BOJ is now under pressure to repeat last night's dollar buying in the event that the market pushes down to levels below 105.