Dollar Steady vs Yen: Japan's Recession Offsets Hedge Fund Selling Concern
Dollar Steady vs Yen: Japan's Recession Offsets Selling Concern
Tokyo, Oct. 15 (Bloomberg) -- The dollar was little changed
against the yen, after rising for a third day yesterday, as
concern about Japan's recession offset speculation that hedge
funds may buy yen to pay back loans that financed investments.
Because Japan is in its worst recession in more than 50
years, the Bank of Japan won't lift interest rates from record
low levels anytime soon. That prompts Japanese to sell yen for
dollars and other currencies to invest abroad for higher returns.
''Unless hedge funds start to sell dollars furiously, the
dollar will be supported against the yen,'' said Takeshi
Imamichi, a foreign exchange manager at Industrial Bank of Japan.
''There's a tug of war going on between hedge funds selling near
120 yen and Japanese investors buying the dollar when it dips.''
The dollar was quoted at 118.60 yen, down from 118.70 yen in
late New York trading yesterday. It was quoted at 1.6370 marks,
down from 1.6395 marks in New York.
The U.S. currency yesterday climbed for a third day, rising
as high as 120.18 yen, because Japanese took advantage of the
dollar's 14 percent decline last week to buy the currency at
cheaper levels. In its biggest weekly decline since 1971, the
dollar touched a 16-month low of 111.58 yen on Oct. 8. It's down
19 percent from an eight-year high of 147.66 yen on Aug. 11.
Investing Abroad
''Japanese won't stop investing in dollars,'' said Katsumi
Ueno, deputy general manager of the retail section at Nikko
Securities Co., whose net increase in Japanese investment in
dollar-denominated money market funds totaled $146 million
between Wednesday and Friday last week.
''Their choice of investment is limited,'' he said. ''They
can't park all of their money in Japanese bank deposits, which
provide a mere 0.2-0.3 percentage point return.''
Returns on yen-denominated investments are so low because
the Bank of Japan has kept the discount rate, at which it lends
money overnight to banks, at a historic low of 0.5 percent since
September 1995. Because the Japanese government expects the
economy to shrink 1.8 percent in the year ending March 31, the
central bank isn't likely to raise the rate anytime soon.
By comparison, the U.S. federal funds rate on overnight
loans between banks is 5.25 percent.
''As long as Japanese continue to buy dollars, the dollar
won't fall dramatically,'' said Tetsuhisa Hayashi, a foreign
exchange manager at Bank of Tokyo-Mitsubishi Ltd.
Weighing on Dollar
IBJ's Imamichi said he doesn't expect the dollar to rise
above 120 yen this week because hedge funds -- which speculate in
stocks, bonds and currencies on behalf of wealthy investors --
may buy yen to pay back loans that financed investments in global
financial markets.
In the past three years, funds borrowed yen at Japan's
record-low lending rates and converted the proceeds into dollars
for investment. After Asia's economic crisis spread to Russia and
Latin America in the past few months, the funds began to reverse
so-called yen-carry trades.
Meanwhile, the dollar reacted little when Japan's Finance
Ministry announced the country's current account surplus expanded
19.6 percent in August from July to 1.5707 trillion yen ($13.2
billion). The surplus -- the value of all goods and services
going in and out of the country -- rose 43.6 percent from August
1997 to 1.1576 trillion yen.
In other trading, the dollar was quoted at 1.3310 Swiss
francs, down from 1.3357 Swiss francs in late New York trading
yesterday. The British pound was quoted at $1.7077, up from
$1.7041 in New York. The mark was quoted at 72.43 yen, up from
72.40 yen in New York.
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