Dollar soars vs. yen after Japan intervenes

By David J. Lynch, USA TODAY

The dollar rose sharply against the yen after the Japanese central bank surprised investors by intervening in foreign exchange markets.

"It was an incredibly successful first salvo," said Greg Salvaggio of Tempus Consulting.

In its first foray into foreign exchange markets since 2004, the Bank of Japan acted unilaterally to sell yen and buy dollars, driving the U.S. currency up more than 3%. Brown Bros. Harriman told clients that additional yen sales are likely, quoting sources in the Japanese Finance Ministry.

For months, the yen has steadily strengthened against the dollar. One greenback was worth more than 94 yen at the beginning of May, when the European debt crisis began roiling markets. As investors sought a refuge from the European storm, they piled into yen-denominated assets. A more than 10% jump in the value of the yen since then has hurt Japanese exporters by making their goods more costly in global markets. The dollar closed Wednesday in New York at 85.62 yen.

U.S. exports to Japan in July totaled $5.1 billion, up 24.3% from the same month one year ago. But for now, the impact of the Japanese action on U.S.-Japanese trade is likely to remain muted, according to economist Nigel Gault of IHS Global Insight.

Global investors remain wary of taking risks, so demand for yen will remain high. Signs of a slowing U.S. economy make the dollar less attractive.

Plus, the Bank of Japan acted on its own to weaken the yen. "The fundamentals still point to a higher yen. ... Historically, intervention is usually more successful if it's a coordinated thing," Gault said.

Japanese authorities are not taking steps to counterbalance the effect of their yen sales on the domestic economy. So the Bank of Japan's intervention risks boosting domestic inflation and possibly fueling new asset bubbles, Capital Economics told clients in a research note. The firm said "further intervention will be required" to keep the yen from returning to its previous highs.

Another factor in the yen's rise has been recent Chinese purchases of the currency. China's yen-buying came amid U.S. demands for Beijing to allow the yuan to rise against the dollar. "In effect, the Chinese managed to get the Japanese to do their dollar-buying for them," Tim Duy, economics professor at the University of Oregon, wrote on his blog.

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