Dollar hits three-year low against yen as Japan recovers

THE dollar extended its losses on Tuesday, hitting a three-year low against the yen as markets mulled over a new theory Japan would refrain from selling its currency to bolster its exports.

The greenback extended its broad decline in the wake of a weekend call by the Group of Seven major industrial nations for more flexibility in exchange rates.

Currency markets took the G7 statement as a request to Japan and China to stop intentionally weakening their currencies.

Subsequent dollar losses against the yen triggered a dollar slump against other key currencies, including the euro and sterling. But a round of short-covering in the dollar has mitigated the yen’s overall progress against the greenback.

“There isn’t really any story that has caused this round of short-covering,” said David Gilmore, partner at Foreign Exchange Analytics. “It’s natural to expect in the midst of big move. It’s still early in this move,” he said.

A Japanese market holiday thinned Asian trade. With no significant news or data expected in the US session, dealers were likely to keep speculating on if Japanese monetary authorities would stay out of the market.

“The question is do the G7 just let it fester and let the markets draw their own interpretations? Or will there be a concerted effort to try to get the genie back in the bottle?” said Robert Sinche, global head of currency strategy at Citibank in New York.

He also noted markets seem to view the US endorsement of the G7 statement as an apparent abandonment of the US strong dollar policy. US Treasury Secretary John Snow on Monday said there had been no change to US dollar policy.

While the risk of Japanese intervention was noted, traders said the Bank of Japan appeared not to have made any attempt to stem the yen’s latest surge. Talk swirled in the market that 110 yen to the dollar might be Japan’s new threshold.

Japan is concerned a rapid rise in the yen could jeopardise the country’s tentative export-led recovery and has spent nine trillion yen (7061bn) in yen-weakening currency intervention already this year.

Comments from Japan’s leading financial diplomat, Zembei Mizoguchi, that the yen’s rise was too rapid injected some wariness into the market.

Mizoguchi, attending IMF meetings in Dubai, said the yen’s recent surge had been partly due to speculative buying and Japan would act as needed to stem disruptive exchange rate moves.

Some analysts characterised Mizoguchi’s talk as verbal intervention that has had only limited impact.

“The verbal intervention is part of what brought the dollar back up above 111 yen,” said Greg Anderson, senior foreign exchange strategist at ABN Amro in Chicago.

On a day lacking key US economic data, markets can look ahead to comments from Dallas Fed President Robert McTeer, who gives an update on the economy at 22.00pm GMT).

Earlier, Richmond Federal Reserve President Alfred Broaddus said a weak jobs market posses the biggest downside risk to the US economy.