SURGING MARKETS : U.S., Japan Act Jointly to Bolster the Dollar : Currency: Spirit of cooperation catches the financial markets by surprise.
In a move that caught financial markets by surprise, the United States and Japan plunged deeply into the global currency market Friday to bolster the dollar--a move that demonstrated cooperation between recently feuding officials of the world’s two largest economies.
At one point during the day, the U.S. currency hit a six-week high before dipping slightly.
The intervention, coordinated by the Treasury, the Federal Reserve System and the Bank of Japan, followed by one day the Fed’s decision to cut a key lending rate by a quarter of a percentage point, a step that could make investment in the dollar less attractive and send investors looking for better rates overseas.
It also followed a move Friday by Japan’s central bank to allow Japanese short-term interest rates to fall in an effort to shore up that’s nation’s weak economy.
“I can confirm that the Federal Reserve Bank of New York operated in exchange markets on behalf of the Treasury Department and the Federal Reserve System jointly with Japanese monetary authorities,” a Treasury spokeswoman said in a statement worded carefully to reveal little about the action, including its size or the motivation behind it. But traders said the intervention appeared to involve at least $1 billion.
The dollar had dipped only slightly Thursday after the Fed rate cut was announced, and Friday’s action appeared to have its intended impact. By the end of the day in New York, the dollar was quoted at 86.80 Japanese yen, up from 85.04 the previous day. It had hit a high during the day of 86.97, the highest for the U.S. currency since May 25. It was quoted at 1.3930 German marks, up from 1.3790 on Thursday.
Some analysts saw the measure as a preemptive strike to head off a decline in the value of the dollar in currency markets as they reacted to the drop in the federal funds rate, the rate charged for overnight loans among banks, and a corresponding drop in many commercial banks’ prime rates. But others took a broader view.
“When we look back on this, it will be quite significant,” said James McGroarty, president of Tartan Trading Co. of Harrison, N.Y., and a former senior currency trader at the Federal Reserve Bank of New York.
Following the rocky tenor of the U.S.-Japan relationship, under the spotlight as a result of the two nations’ differences over automotive trade issues, the coordinated currency trading demonstrates that the United States and Japan can cooperate on such crucial issues as the values of their currencies, McGroarty said.
“It clearly looked to me like the Bank of Japan was sending a solid signal [that] they were trying to coordinate and cooperate with the Fed,” he said, referring not only to the support for the dollar but also to the cut in Japanese short-term interest rates announced in Tokyo after the Fed cut Thursday.
The United States has been pressuring Japan for months to bring down interest rates as a step toward bringing vitality to its stalled economy. Washington officials believe that a growing Japanese economy would help boost the market there for U.S. goods, helping to right the trade imbalance between the two nations and leading to growth of U.S. jobs in manufacturing goods for export. In 1994, the trade deficit with Japan totaled $66 billion.
In addition, just as lower U.S. rates can send investment dollars overseas, a lower rate in Japan adds to the appeal of dollar-denominated investments.
The intervention marked the second time the United States and at least one major trading partner had moved to shore up the dollar since the Group of Seven industrial nations--the United States, Britain, Canada, France, Germany, Italy and Japan--agreed in April that the dollar was undervalued and that they would work together to reverse its then-downward direction.
With the Japanese economy showing no signs of solid recovery and the U.S. economy--although considered fundamentally strong--slowing, the dollar has been seen as unreasonably weak in recent months.
“Treasury and the Fed have been frustrated that the dollar is not stronger,” said David Buchen, managing director for foreign exchange at Citibank.
The decision to intervene, he said, “was the exclamation point on the message they wanted to get across: that neither the economy nor the policy in the United States has been so bad.
