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Strategies & Market Trends : Currencies and the Global Capital Markets

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To: Frodo Baxter who wrote (593)	9/7/1998 9:22:00 AM
From: Henry Volquardsen	Read Replies (1) of 3536

Couple of points. The fx markets don't always move to reflect economic realities. The rally to $/yen 250 in the mid 80s also saw $/DM going to 3.48. Neither reflected economic fundamentals. There were several factors associated with very tight monetary policy coupled with a huge selloff in global commodity prices that create an effective short squeeze on the dollar that became self perpetuating. But those levels were unsustainable and would have eventually reversed on their own. I remember trading thosr markets vividly. Also it is tougher to determine an appropriate exchange rate for yen than it is for the more open European economies. It depends what segment of the Japanese economy you look at. I saw a study a few years ago that suggested, at that time, that there were multiple equilibrium levels for yen. 110, I believe, was appropriate for electronic, 130 for autos and so on for the various export oriented sectors. But the protected sectors of the economy such as agriculture were all well over 200. Henry

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