Fed and ECB intervene for BOJ to weaken yen

Fed and ECB intervene for BOJ to weaken yen

Andrea Ricci, Reuters, Tokyo/New York

Japan enlisted the European Central Bank and the U.S. Federal Reserve to help sell yen on Friday, raising the specter that unease may be growing in the world's three top economies over volatile currencies.

Japan has been eager to dampen the export-damaging strength of its currency, and the Bank of Japan has already intervened to sell yen for dollars at least six times since May 22.

But the yen has continued to gain against the greenback, hitting a nine-month high early on Friday before central banks jumped in unexpectedly.

"We are intervening in the market," Japan's top financial diplomat Haruhiko Kuroda told Reuters. "The ECB and Fed are operating on behalf of the BOJ as well."

The dollar immediately surged more than one yen to above 120.30 yen in the New York morning from 118.90 shortly before the action. By late afternoon, it was trading at 119.53. The euro jumped from around 118 yen to around 118.80 and eased to 118.49.

Kuroda added: "We will continue to monitor currency markets carefully and take appropriate action as needed."

An ECB spokesman confirmed it was intervening on behalf of Japanese authorities, buying euros against the yen. In London, the Bank of England decline to comment on whether it had taken part in the action, as did the U.S. Treasury and New York Fed.

The Swiss National Bank said it had not been involved.

Japan last acted to cap yen strength in September 2001, which proved relatively successful as it coincided with a broad-based rally in the dollar.

But this year the currency has soared more than 9 percent against the dollar, largely due to global investors' disenchantment with sinking U.S. asset prices rather than a desire to own yen.

Friday's action marked the first time the Fed and the ECB had sold yen for the BOJ during the latest bout of intervention. In previous instances, the BOJ acted on its own.

Analysts were divided on whether the joint action signaled that policymakers were worried about the pace of the yen's rise, and by extension, the dollar's fall.

"It seems likely a timely reminder that the dollar's fall had begun jeopardizing the world's recovery," said Marc Chandler, currency strategist at HSBC in New York.

A falling dollar can weigh on U.S. stocks and bonds by curtailing foreigners appetite for dollar-denominated assets, which in turn makes it more difficult to finance the nation's current account gap as capital inflows moderate.

A weaker dollar can also be inflationary.

These are problems for the United States. But they can also cause troubles for other countries if U.S. growth slows, lessening American demand for foreign goods and hence dampening growth globally.

U.S. leaders repeatedly have indicated they support a strong dollar but have said markets should set rates and have taken no steps to stop the dollar's slide. Indeed Treasury Secretary Paul O'Neill has shown a distinct distaste for meddling in foreign exchange markets.

And some dealers suspect that President George W. Bush might tolerate some dollar weakness to help U.S. exporters. The dollar has risen more than 30 percent on a trade-weighted basis since mid-1995 before starting to slip this year.

S&P MMS Senior Currency Analyst Ron Simpson was one market watcher who said the three-way intervention on Friday was not meant to send any signals to the market.

"I don't think the market is going to get any impression that the Fed wants the dollar higher," he said.

Indeed, he said, it would be typical for the Fed to act on behalf of the BOJ or any other central bank during U.S. hours. What was atypical was the BOJ's move last month to sell yen for dollars through Tokyo banks' overnight foreign exchange desks during U.S. trading hours.

It would be far different if the U.S. and Europe had sold their own yen reserves. Such a concerted intervention would be taken as a powerful signal that the major economic powers were distressed by the action in currency markets.

But Mike Malpede, senior foreign exchange analyst at Refco Group, said the Group of Three heavyweights may have wanted to intervene without the fanfare of a concerted action.

"They may be trying to avoid the appearance of that in case it failed," he said.

'I think they are making an effort to signal to the market that there are concerns from the G8 about the dollar's fall," Malpede added. Leaders of the Group of Eight industrialized countries held a summit in Canada this week.

Regardless of what type of signal the G3 was trying to send on Friday, analysts said the BOJ would keep up the pressure.

"The Japanese authorities have again displayed their determination to resist a yen appreciation," said Steven Pearson, chief currency strategist at Halifax Bank of Scotland Treasury Services in London. "We expect more to follow should rates slip back."