Japan traders see $ slipping more on Fed,S America
04:30 a.m. Sep 07, 1998 Eastern
By Kanta Watanabe
TOKYO, Sept 7 (Reuters) - The dollar may be entering a medium-term downward trend as deepening troubles in emerging markets add to pressures on the U.S. Federal Reserve to cut interest rates, Tokyo dealers and analysts say.
Turmoil in Latin American economies, due to their close links with the United States, could weigh on the dollar in the same way that the currency crisis in Asia has put pressure on the yen over the last several months, they said.
Shigeo Ichioka, a strategist in the market trading department at Asahi Bank, said the dollar could enter a similar downtrend to that seen after the Mexican economic crisis began in late 1994.
''Mexico's financial sector may be heading into deeper troubles as Mexican borrowers' cost of servicing dollar-denominated loans has doubled due to the peso's fall,'' said Ichioka.
The Mexican crisis of 1994 was followed by the dollar's fall to a record low of 1.3450 marks in March 1995 and a record low of 79.75 yen in April 1995. At the beginning of 1995, the dollar had stood around 1.5600 marks and 101 yen.
Fears that Brazil might be forced to devalue its currency and trigger a competitive devaluation in the region sent Latin American stocks and currencies reeling on Friday.
Brazil's central bank is estimated to have sold between $600 million and $1 billion on Friday to support the real, which ended flat at 1.1780 to the dollar on the day.
The Mexican peso also fell sharply on Friday, with the benchmark 48-hour contract falling 7.7 centavos to a historic low of 10.2000/10.2170.
''The possibility of the Fed cutting interest rates to stave off the downward spiral in share prices worldwide is growing,'' said Ryohei Muramatsu, manager of treasury and foreign exchange at Commerzbank in Tokyo.
''(Fed Chairman Alan) Greenspan is showing a flexible stance, so the timing of easing may depend on the moves of the New York Dow.''
Greenspan said in a speech on Friday that the Fed now saw a balance of risks facing the U.S. economy, between deflationary pressures from international crises and domestic inflation. ''It is just not credible that the United States can remain an oasis of prosperity unaffected by a world that is experiencing greatly increased stress,'' Greenspan said.
Expectations of a Fed easing are expected to invite more unwinding of dollar longs against the yen as the dollar would lose its lustre if the interest rate differential between Japan and the United States narrowed, dealers said.
Friday's meeting in San Francisco between U.S. Treasury Secretary Robert Rubin and Japanese Finance Minister Kiichi Miyazawa provided the market with no fresh insights, they said.
Active unwinding of yen short positions by U.S. hedge funds pushed the dollar down as low as 131.45 yen in Tokyo on Monday, compared with 133.51/61 yen in New York late on Friday.
''We may see more dollar selling against the yen by operators trying to cover losses incurred in emerging markets,'' said Yasuji Yamanaka, chief manager of the foreign exchange division at Nikko Trust and Banking Corp.
The dollar's slide could also gain speed if more Japanese investors sell dollars for hedging purposes, dealers said.
Eisuke Sakakibara, Japan's vice finance minister for international affairs, told reporters on Monday: ''I am very concerned that among Japanese investors, there are some people who do not fully recognise the risk of a yen rise.''
A dealer at a Japanese bank said: ''It may now be a good idea to take Sakakibara's advice more seriously.''
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