Dollar Selloff Defies Japan's Warning

The dollar was hit by a second day of relentless selling yesterday as traders shrugged off warnings from Japan that it would intervene to prevent excessive moves in foreign exchange markets.

With Tokyo's markets closed for a public holiday, traders pushed the yen to a three-year high against the dollar, testing the Japanese government's commitment to the policy of capping its currency.

Japan's senior financial diplomat, Zembei Mizoguchi, repeated last night that Tokyo stood ready to act if currency market swings were excessive. "If markets cannot self-correct and there are wide fluctuations, we are always ready to take appropriate action as needed." The weekend call by finance ministers from the seven leading industrialised nations for more "flexibility" in exchange rates did not represent a change of stance.

The G7 statement was widely interpreted as a victory for the United States, which wants Japan and other Asian governments to stop intervening in the markets and allow their currencies to rise. Washington is hoping a cheaper dollar will help close America's billion dollar a day trading gap with the rest of the world.

US treasury secretary John Snow said yesterday the rest of the world could not continue to rely on American consumers buying their goods to drive growth in their economies. "While export growth can serve a useful purpose, you can't have a successful world economy if everybody relies on the export sector," he said. "Then, you build in imbalances."

So far, the Bank of Japan appears not to have made any attempt to stem the yen's latest surge, and the markets are now speculating that ¥110 to the dollar might be Japan's new threshold. In US morning trade, the dollar was down 0.44% at ¥111.76.

"Until the Japanese actually intervene, dollar/yen is going to continue to see the downside," said Greg Anderson, a senior foreign exchange strategist at ABN Amro in Chicago.

Asian countries account for about 40% of US trade, so any rise in their currencies' value makes American exports more competitive. With fears rising in the White House that a sluggish economy could cripple President Bush's re-election chances, policymakers are blaming Asia for America's stubbornly high unemployment and slow growth.