Given their reluctance to join the Japanese government in currency intervention, U.S. officials seem fairly sanguine about how far the dollar's fallen against the yen. But they may have cause to worry about where it's going.
The greenback's technical position against the Japanese currency is horrendous. At around 104 yen, it has broken through the neckline on every chartist's favorite reversal pattern, the head and shoulders. More esoterically, the dollar has taken back more than 62% -- a popular Fibonacci retracement number -- of its rally from its 1995 low against the yen to last year's high. And though it is unclear what a sequence of numbers named after a 13th-century Italian mathematician has to do with currency levels, currency traders put a lot of stock in the idea. That in itself is damaging to the dollar position.
Both chart patterns suggest a return to the dollar's secular decline against the yen -- a trend that really began with the end of World War II -- and a move to new lows. Though technical analysis, especially when it comes to forecasting currency movements, is a rather dicey thing, that the dollar has broken important levels may encourage piling on. It may prompt the kind of disorderly decline in the dollar that the
cannot countenance, and seriously hamper Japan's long-term recovery prospects. A strong yen hurts Japanese exporters and also introduces pricing pressures at home, as foreign goods get cheaper.
Bucking the Trend
"Given everything policymakers have said, we're expecting more concerted intervention, with the U.S. coming in," says Wesley Paul, managing director at
J.P. Morgan/Morgan Guaranty Trust
Whether an intervention does happen will likely depend on whether the market takes the technical bait: if, seeing the trend reversal, investors are willing to bet on a dollar decline below the 100-yen level despite the threat of an intervention. Some downplay the technical factors in this case, and think the dollar will begin to stabilize.
"With the yen's movement of late, the technicals have been playing less of a role," says John McCarthy, senior vice president at
ING Barings Capital Markets
. "I don't think the technical break will be as dramatic as if we came down here very quickly." Only if the decline in the dollar gets disorderly does McCarthy think there will be a real threat of intervention.
But Paul thinks the prospect of another decline in the Japanese economy will be enough to prompt the Treasury to intervene. If Japan were to weaken again, after all, chances are the yen would again seriously decline against the dollar, hurting U.S. companies' profitability. Moreover, it would seriously damage all of Asia's recovery prospects.
"The market is getting very wary of intervention," says Paul. "It's expecting it at any moment."