G-7 May Take on Japan Over Yen

The dollar fell to a 2 1/2-year low against the yen Friday, sparked by speculation that the Group of 7 of the world’s largest economies may object this weekend to Japan’s efforts to weaken the yen.

Finance ministers from the G-7 meet in Dubai, United Arab Emirates, this weekend. Some in the foreign exchange markets believe the leaders may chastise Japan, which has sold its currency to curb yen strength and protect Japanese exporters’ competitiveness.

Talk that the finance ministers may ask Japan to refrain from that practice sent the dollar as low as 113.58 yen Friday. It closed at 114.29 in New York, down from 115.34 on Thursday. Traders said the next key level to watch is 113 yen and possibly 112 yen over the weekend.

Many believe that if Japanese finance officials diminish the intensity of yen-weakening foreign exchange interventions, the yen will continue firming.

“There is scope for the dollar to depreciate against Asian currencies including the yen,” said David Gilmore, partner at Foreign Exchange Analytics. “That doesn’t mean that Japan will not intervene, but that it will do so in smaller amounts and focused on smoothing the movements in the currency.”

Against its major European counterparts, the dollar was down after a fairly mediocre batch of economic data in the last few days, analysts said.

With the G-7 meeting out of the way next week, traders can look to data for changes to the economic outlook. For the most part, the week will be free of scheduled market-moving news or data. On Thursday, a report on U.S. durable goods orders will be released.

According to unconfirmed reports, a draft communique from the G-7 indicated that member countries would continue to monitor exchange rates and cooperate when necessary. The group also hopes to strengthen dialogue among major economies to smooth imbalances in the foreign exchange market.

Adding further fuel to the fire were statements from Bank of Japan Governor Toshihiko Fukui downplaying speculation that Japan’s foreign exchange policy would come under closer scrutiny, traders said.

He also indicated that with respect to the Chinese yuan currency, Japan is hoping for “constructive talks” while respecting China’s position on the exchange rate for its yuan currency.

China has come under fire from the international community for pegging its currency to the dollar in an effort to preserve its exporters’ trade advantage.