Yen firms vs US dollar due to crisis

The crisis in Japan had pushed the US dollar to its lowest levels since World War II against the Japanese yen, a trend that threatened Japan's already battered economy.

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The crisis in Japan had pushed the U.S. dollar to its lowest levels since World War II against the Japanese yen, a trend that threatened Japan's already battered economy.

To block that damage, the Group of Seven major industrialized countries announced late Thursday a “concerted intervention” to trim the yen's gains against the dollar.

“We express our solidarity with the Japanese people in these difficult times, our readiness to provide any needed cooperation and our confidence in the resilience in the resilience of the Japanese economy and financial sector,” the G-7 finance ministers and central bank governors said in a brief statement issued after an emergency telephone conference call.

Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke participated in the call for the United States.

Investors had been selling off their dollars and buying yen on the expectation of a major rebuilding effort in Japan. A weaker dollar makes U.S. exports cheaper overseas. But it also could fuel inflation at a time when prices for food and oil are already creeping up.

But after the coordinated intervention was announced early in the trading day in Japan on Friday, Japanese stocks rallied and the yen fell against the dollar.

The dollar had fallen Wednesday to the point where it took only 76.32 yen to buy $1 - the lowest level since the mid-1940s. It rose to trade at 78.97 yen Thursday afternoon.

The dollar's value against the yen has been sliding for months. But the trend accelerated following last week's devastating earthquake, tsunami and resulting nuclear crisis.

Normally, a country facing such calamities would see its currency weaken in value as investors grew concerned about weaker economic growth, said Mark Zandi, chief economist at Moody's Analytics.

“That is being overridden at the moment by the view that a lot of money will be brought back to Japan” for widespread reconstruction, Zandi said.

A weaker dollar against the yen means that Japanese autos and other goods would cost Americans more while U.S-made cars and other products would be more competitive in Japan.

But it could also lead to inflation because the price of Toyotas and Hondas would rise.

And the price of oil could rise at a time when it has already been trading above $100 a barrel. The reason is that oil producers are paid in U.S. dollars. So a weaker dollar would prompt Saudi Arabia and other producers to raise the price.

Currency traders had been watching to see the outcome of a conference call late Thursday between finance ministers and central bank governors of the Group of Seven major industrial countries - the United States, Japan, Germany, France, Britain, Italy and Canada.

The announcement of the coordinated intervention caught analysts by surprise. The G-7 nations had not intervened jointly in currency markets since 2000 when they worked together to bolster Europe's new currency, the euro.

Analysts said currency traders had been anticipating that demand for the yen is going to spike in coming weeks. Japanese companies will cash their dollar holdings and return their money to Japan to meet what are expected to be massive rebuilding costs. The yen also rose in value after the 1995 Kobe earthquake.

Another hit to Japan and the world economy could occur from the disruptions to global supply chains. That could prevent assembly of autos and cell phones and other goods that depend on critical components that are made in Japan. However, it was expected that other countries such as China will move to fill those supply gaps.

“The supply chain issue is so complicated that it is difficult to say whether this will help or hurt the United States but at least temporarily it will be a disruption,” said Sung Won Sohn, economist at the Martin Smith School of Business at California State University. - Sapa-AP

Source: http://www.iol.co.za/yen-firms-vs-us-dollar-due-to-crisis-1.1043905

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