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Mr. Yen Comes to Washington

Foreign exchange markets are all abuzz over today's Washington visit by Mr. Yen, Vice Minister of Finance

Mr. Sakakibara

. Unofficial sources say he is scheduled to meet with both




. Everyone is presuming that the purpose of the Summers meeting is to talk the


into joining


in intervening in the foreign exchange market to slam down dollar/yen.

In previous

columns, I have written that I find it mystifying that the Japanese authorities are seeking to strengthen the yen. Be that as it may -- either I have missed the point or Sakakibara doesn't know which end is up -- the focus now shifts to the U.S.

I believe that

Mr. Rubin

will not go along with plans for intervention. I have two reasons.

First, the pattern of his cryptic commentary on foreign exchange leads me to believe that Mr. Rubin sees intervention as desirable only when market levels of exchange rates are far from fundamental values. Back when he took office at the end of 1994, the dollar was fast slipping into the tank. He publicly stated that the dollar was undervalued for fundamental reasons. So he spent the first year and half of his administration battling to get the dollar back up from its low of 79.70.

Then came the Berlin G7 conference last spring. The secretary let out his usual mantra that "a strong dollar is in the U.S. interest" and then shocked the market by adding, "and the dollar has been strong for some time now." At first, the market thought that he was trying to cap the dollar's rise. Careful reading of his comments led me to understand that he meant something very different. He meant that his mission to correct the undervaluation of the currency had been a success. He no longer needed to support the buck. But he also didn't see the need to make it go down -- the currency had begun to reflect fundamentals. Analysis of his remarks at that time led me to formulate the Rubin credo: We don't intervene unless market prices are clearly wrong.

I think that dollar/yen at 134 is not wildly wrong given all the trouble in Japan and the rest of Asia. My target for dollar/yen is 140. The currency strategist for

Union Bank of Switzerland

went on


Wednesday and said 150 is his target. Moreover, I don't know any economist who thinks the dollar is overvalued against the yen at current levels. So if the Rubin credo is still good, Mr. Sakakibara is going to go away empty-handed.

The second reason that Mr. Rubin will decline to support intervention is that everything is coming up roses right now in America. His dream is about to come true -- there is a very real possibility that the U.S. government will soon run a budget surplus. Ever since he has come to Washington, Rubin has preached that budget deficits are hazardous to economic health. Now he is on the verge of achieving what no one would have even dreamt would be possible in


term -- a budget surplus. Way to go Mr. Secretary! Low interest rates have definitely helped. Part of the reason for the collapse in U.S. bond yields is that foreign investors are piling into the U.S. bond market. Would yields stay so low if these investors thought that the American government had changed its mind and wanted a lower dollar? So why risk ruining a good thing?

We will soon see what gives. My guess is that Mr. Summers will make some remarks to the effect that volatility in foreign exchange markets is undesirable and that Japan must stimulate domestic demand.

If I am wrong, then policy has changed.

* * * * *

Suharto to the IMF: Drop Dead!

Yup -- that's effectively what the


president said yesterday when he announced the new budget. Loads of subsidies and shaky forecasts of government revenues. What is Suharto doing? I think he sees that the IMF is declining in influence. Then he sees the


trying to bug out on their deal. Plus


is worse off today then when the IMF jumped in with the rescue plan. I think Suharto is putting up a trial balloon to see just how far he can push the IMF around.

Lee Kuan Yew on the Yuan

How many government high-officials do you know who even know that there is a forward market for foreign exchange? Lee Kuan Yew does! Here is what he said recently on the Chinese currency: "They (China) have said they will not devalue. The market may or may not believe them because the one-year forward rate of the yuan is already 9.60 to the US$1 as against 8.30 now."

I don't subscribe to the idea that the forward is a predictor of the future spot, but I give the senior minister credit anyway. In the rest of the interview, he goes on to say that he thinks China is right to resist devaluation but may not be able sustain the current level for the currency. I think this is interesting because Mr. Lee is just about the most well-informed man in Asia. If he thinks Beijing will have trouble holding the peg then think again if you believe that the crisis is nearly over.

David DeRosa heads a trading research firm and is an adjunct professor at the Yale School of Management. His column on international finance and trading appears every Tuesday. He welcomes your feedback at