Dollar Fades; Central Banks, Fed Sell Yen for Japan

The dollar waged a losing battle with market pessimism Friday, giving up ground against the yen and euro even after the Bank of Japan sold yen with the help of U.S. and European central banks.

The dollar came within a hairbreadth of the psychologically important parity level with the euro--touching 99.90 cents per euro at one point in the European trading session--before a surprise round of dollar-supportive central bank intervention offered the greenback a reprieve.

“Markets, which have focused on dollar weakness, were thrown out of their stride a bit with the intervention to weaken the yen,” said Patrick Collins, currency trader at Ruesch International.

Japan, reliant on its export sector to give legs to its economic recovery, has intervened seven times in the last two months to stem the yen’s strength. In its latest foray into currency markets, the BOJ enlisted the aid of the European Central Bank and the Federal Reserve to sell yen for dollars and euros on its behalf during U.S. trading hours.

Friday’s action marked the first time in the recent series of interventions that the BOJ had acted via the ECB and the Fed, although neither the United States nor Europe sold their own yen reserves.

Analysts were mixed as to whether the participation by the Fed and the ECB was meant to send a signal to the market that unease may be growing in the top three economies over movements in the currency market.

The dollar shot up over one yen to trade as high as 120.36 yen, before slipping back to finish at 119.66 in late U.S. trading. But the dollar remained well above the nine-month low of 118.36 yen reached earlier in the session.

At the start of this year, the dollar was worth 132 yen.

The intervention also gave the dollar an indirect lift against the euro, which earlier had advanced to fresh 28-month peaks just below $1. In late U.S. trading the euro bought 99.2 cents, up from 98.9 cents Thursday and up from 89 cents on Jan. 1.

Currency analysts contend the intervention will have a short-lived effect, given the negative sentiment surrounding the dollar and U.S. assets.

News that Xerox Corp. would restate five years of results to reclassify more than $6 billion in revenue further battered confidence in the ability of the United States to keep drawing in the foreign capital necessary to finance its trade imbalance, traders said.

“The fundamental forces at play--namely a rebalance of portfolios away from distrusted dollar-denominated assets--has only begun,” said David Mozina, director of global foreign exchange and fixed-income research at Bank of America in New York.

“We think the move in the dollar is not cyclical but secular in nature,” he added. “Today’s intervention may buy the greenback time, but that is about all.”