Treasury Secretary John Snow has made it clear that the eight-year-old U.S. strong dollar policy is now a "not-so-strong" dollar policy.

But the U.S. isn't the only country that wants to wring economic benefit out of a cheaper national currency. The world's second-largest economy, Japan, has long had a strategy to keep the yen weak to bolster exports.

Let's attempt to view the U.S.' currency policy shift from the perspective of a Japanese monetary policy official to see who might win in the race to have a cheaper currency.

A weak yen makes Japanese products relatively less expensive, boosting overseas sales. A company such as Toyota loses about 20 billion yen ($171 million) in operating profit for every one yen rise against the dollar, according to analysts. Multiply those lost sales over many companies, and that amounts to hundreds of billions in lost revenue. Lost sales aren't what a bureaucrat charged with pulling an economy out of a 10-year slump wants to see.

The way to combat the unwanted rise in the yen is to intervene in international currency markets, buying dollars (or euros) and selling yen. Last week, Japan reported that it spent 2.38 trillion yen ($20.36 billion) buying dollars and euros to weaken the yen. Recently, Japan has stepped up its activity in the foreign exchange markets. In a one-week period in May, the Bank of Japan spent nearly the entire amount it spent last quarter -- 2 trillion yen -- to stem the slide of the dollar.

While government intervention in the currency market doesn't have a great track record of working out over the long term, massive expenditures over the short- and medium-term by well-capitalized institutions like the BOJ have definitely proved effective.

With so much money being spent to keep the currency weak, you might think there's a limit to the amount Japanese finance officials would be willing or able to spend to defend against a strengthening yen. But think about it. The Japanese don't have anything to lose by printing yen and buying dollars.

Mired by deflation at home, the inflationary act of printing yen is precisely the remedy required to spark the price growth that will encourage domestic spending and investment. In fact, with Japan unable to kick-start the economy through domestic monetary policy measures, deflation is shaping up to become Japan's largest export in 2003.

At this stage, with its economy already stuck in a spiral of economic stagnation and deflation, Japan has the least to lose by printing yen and selling them against rival currencies. So although September dollar index futures (DXU3:NYBOT) are likely to continue imploding -- the euro greatly outweighs the yen on the dollar index -- look for BOJ forex market interventions to keep downward pressure on the yen.

Other Impacts

Over the past month, I've written about the percolating momentum in debt futures. There is an arbitrage trade for the Japanese government that works to support the rally in debt futures.

Here's how it works. The Bank of Japan prints fresh yen notes. With the currency, it buys U.S. Treasuries, yielding anywhere from 1.25% for short-dated Treasury bills to nearly 5% for T-bonds. If you've been wondering who might benefit by buying into the already extended move in debt, bear in mind that a 1.6% deflation rate plus say a 4.4% yield on T-bonds equates to a 6.0% real rate of return. And don't forget Japan will sell more Toyotas with each one-yen drop in the price of their currency while sparking domestic inflation.

Now that the world's two largest economies seem bent on devaluing their currencies and generating inflation, it's little wonder that investors are scrambling to find a secure store of value. A store of value and a safe haven during times of depreciating currencies have been traditional justifications for investing in gold. Hence, it's little wonder June gold (GCM3:COMEX) is running neck-and-neck with debt futures and the June Canadian dollar (CDM3:CME) as the strongest momentum markets.

SARS in China

These days in China, most patients now have to pay out of pocket to receive treatment at hospitals. No longer able to provide medical services for free, rural hospitals have asked patients displaying SARS-like symptoms to pay up front. Although the government has said it will pay for all patients diagnosed with SARS, the symptoms of SARS -- a fever and a cough -- are common in a variety of ailments. Many rural Chinese, unwilling or unable to pay to get a clear diagnosis, have steered clear of hospitals. While a mass outbreak of SARS in rural China hasn't yet occurred, poor medical facilities and training heightens the chance that the disease could spread in the countryside, a situation that still threatens the world's most populous nation.

November cotton (CTN3:NYBOT) took a massive hit in mid-April on fear SARS would cause the economy and demand for the fiber in China to contract. China is the world's largest importer of cotton. Cotton has retraced most of the decline since the March highs, but notice in the following chart how cotton held below multiple Fibonacci retracement levels and below its 20-day moving average. Over the past three days, cotton has also traced daily reversal bar formations that suggest it will resume its downhill track.

Marc Dupee is an independent trader and co-author of the book The Best: Conversations With Top Traders. Dupee was formerly markets analyst and futures editor for TradingMarkets Financial Group. At time of publication, he was long gold and T-bonds, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he invites you to send your feedback to Marc Dupee.

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