Japanese central bank intervention threat halts dollar’s slide _ for now

Intervention threat halts dollar slide _ for now

LONDON — Market fears of a possible intervention by the Bank of Japan to support the dollar helped the U.S. currency recover its poise Friday after it hit a 14-year low against the yen.

By mid afternoon London time, the dollar was up 0.3 percent on the day at 86.82 yen. Earlier it had sunk to 84.81 yen, its lowest level since mid-1995 as currency traders sought the sanctuary of the Japanese currency amid mounting concerns about the fallout from Dubai’s financial problems — a government investment fund, Dubai World, asked creditors if it can postpone payments on $60 billion in debt until May.

The fear in Japan is that the surging yen will strangle the fledgling Japanese economic recovery at birth by pricing out the country’s high-value exports and stoking deflation in an economy that has suffered falling prices for the best part of a decade — a higher currency reduces the cost of imported goods.

It seems, if the escalating rhetoric coming out of Tokyo is correct, that the pain threshold may be near.

The country’s finance minister Hirohisa Fujii called the yen’s surge “a very serious situation” and added that Tokyo will take appropriate measures as needed, even suggesting that Japan may cooperate with the U.S. and Europe to calm foreign exchange markets.

“I am monitoring the situation very carefully,” Fujii said.

Japan’s business executives are clearly worried about the yen’s appreciation, which cuts into foreign income.

Fujio Mitarai, chairman of Keidanren, Japan’s largest business lobby group, urged the government to take action.

“In the midst of deflation, such a sharp rise in the yen is a very serious problem and could drag down the economy,” Mitarai told reporters.

The intervention threat was enough to steady the ship — for now.

“Warnings from various Japanese policy makers stabilized price action,” said Hans Redeker, global head of foreign exchange strategy at BNP Paribas.

However, traders say an intervention by the Bank of Japan may not go beyond rhetoric, particularly if the talk keeps a lid on the yen. After all, the bank hasn’t intervened in markets since March 2004.

While a move cannot be ruled out, especially in a country with a recent past of deflation, many wonder if anything can actually be achieved, especially if the dollar continues to pay out minimal returns. There is no sign that the U.S. Federal Reserve has any plans in the offing to raise interest rates from the current level of between zero and 0.25 percent.

Even more important and longer-lasting would be a decision by the Chinese monetary authorities to allow their currency to appreciate against the dollar. Because the yuan is pegged to the dollar at an artificially low level to boost Chinese exports, the dollar tends to be weak against free-floating currencies like the euro and yen.

As a result, investors will be closely monitoring this weekend’s meeting between European Central Bank officials, including its president Jean-Claude Trichet, and Chinese authorities.

“No doubt Japanese official will be watching closely to see if the Europeans can draw any further reassurances from the Chinese government over a move towards a revaluation in the yuan,” said Jane Foley, research director at Forex.com.

“This would relieve some of the pressure on the euro and the yen caused by dollar strength,” said Foley.

Though the Chinese authorities have taken steps to allow their currency to rise against the dollar, it has not been far or fast enough for many.

The IMF has argued that the yuan needs to rise to allow domestic demand in China to increase and make the country less dependent on only exports.

A higher yuan against the dollar would give the Chinese more purchasing power to consume U.S. goods and would help U.S. exporters.

In the run-up to the meetings, the euro has dropped against the dollar, partly because the European currency is considered less of a safe haven asset, and partly because of fears of possible exposure of European banks to Dubai.

The euro was down 0.8 percent at $1.49. On Wednesday, in the immediate aftermath of the Dubai debt announcement, the euro had risen to a 15-month high of $1.5144.

Another currency with few friends at the moment is the British pound, which has fallen a further 0.6 percent to $1.6420 because of British banks’ exposure to Dubai.

Bank of International Settlements figures, quoted by the Royal Bank of Scotland, show that Britain’s banks’ have loans exposure of just under $50 billion to the United Arab Emirates as a whole. France comes next in Europe with $11.3 billion, which is still more than the U.S. or Japan.

Associated Press Writers Malcolm Foster, Yuri Kageyama and Tomoko A. Hosaka contributed to this report.