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Top News
Tue, 1 Sep 1998, 6:49pm EDT
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<Picture>Dollar Tumbles to 11-Wk Low vs Yen as Investors Buy Yen to Pay Off Loans
Dollar Tumbles vs Yen as Investors Pay Off Yen Loans (Update2) (Adds detail on ruble trading at end. Updates rates.)
New York, Sept. 1 (Bloomberg) -- The dollar plunged to an 11- week low against the yen as investors bought the Japanese currency to pay off loans that financed dollar-denominated investments in emerging markets such as Russia and Latin America.
In recent months, many investors used so-called yen carry trades to borrow yen at low lending rates in Japan, where the overnight discount rate is at a record low 0.5 percent. ''As we have seen the forced liquidation of portfolios with exposure to Russia and other high-yield situations, managers are forced to sell their most liquid assets,'' said Virginia Parker, president of Stamford, Connecticut-based Parker Global Strategies LLC, a money management consulting firm. ''Nothing is liquid right now except for currencies and Treasuries.''
The dollar suffered its worst day against the yen since June 17, when the U.S. and Japan jointly sold dollars to prop up the yen. It fell more than 4 yen in earlier trading to 134.98 from 139.30 yesterday. Late in New York trading, it was at 136.14 yen.
The U.S. currency rose to 1.7510 marks from 1.7474 as U.S. stocks rebounded from a 512-point plunge yesterday. The dollar's gains were limited against the German currency as President Bill Clinton met with Russian leaders in Moscow for a two-day summit. Clinton said the U.S. will offer Russia support as it tries to resolve political and economic crises if the government moves ahead with reforms and treats investors and lenders fairly. That news helped support the mark because Germany is Russia's biggest lender and trading partner. Russia owes German banks about $30 billion, according to the Bank for International Settlements.
There's concern Russia's problems could spread to Latin America. If those economies stumble, it would likely hurt U.S. growth.
Interest Rate Cut?
Also dragging on the dollar is growing speculation the U.S. Federal Reserve may cut interest rates to calm global markets, reducing the return on dollar-denominated investments. ''There continues to be talk about a Fed ease,'' said Anne Parker Mills, currency economist at Brown Brothers Harriman & Co.
Japanese Finance Minister Kiichi Miyazawa, in a meeting in San Francisco later this week with U.S. Treasury Secretary Robert Rubin, is likely to propose that leading industrial nations act in concert to lower benchmark interest rates, Kyodo News Service said, citing unidentified Japanese government officials.
Still, analysts and traders said it was unlikely the Group of Seven nations would uniformly lower interest rates. ''No one feels that's a significant risk at this stage,'' said David Gilmore, a partner at Foreign Exchange Analytics. ''Canada just hiked rates, and the Bundesbank is considering raising rates. We're getting a wait-and-see message from the Fed.''
The U.S. target rate for overnight lending between banks is 5.5 percent, while the benchmark rate in Germany is 3.3 percent.
The dollar tumbled against major currencies yesterday after the Dow Jones Industrial Average plummeted 6.34 percent. Today, U.S. stocks rebounded, with the Dow rising 288.36 points, or 3.8 percent, to 7827.43.
Repatriation to Japan?
With Japan's Nikkei 225 stock index up nearly 2 percent overnight, traders said Japanese investors are probably bringing home money invested abroad ahead of Sept. 30, the end of their fiscal half-year. ''There's repatriation to Japan,'' said Diego Giurleo, a manager of foreign exchange at Royal Bank of Canada. ''That's causing an interest in the yen.''
Traders said the dollar's drop versus the yen accelerated after triggering automatic sell orders which traders often place to protect themselves when a currency moves contrary to expectations. ''We could trade lower until cooler heads prevail,'' said Ralph DelZenero, a corporate salesman at First Chicago Bank NBD Corp. He predicted the dollar could drop to 133 yen over the next couple weeks.
More Threats
The dollar has fallen 7.8 percent against the yen since reaching an eight-year high of 147.66 Aug. 11. Part of the drop can be attributed to continued threats of dollar sales by Japanese finance officials, though they haven't carried through so far on the threats.
Reiterating those warnings today, Eisuke Sakakibara, Japan's vice finance minister for international affairs, said buying yen is effective when the currency is already rising against the dollar, according to a Jiji Press report.
Still, many traders see this as a temporary weakness in the dollar, given that nothing has changed in Japan's gloomy economic outlook. The yen is still down about 5 percent against the dollar this year, as the economy remains stuck in its worst recession since World War II.
The dollar ''is trading more on portfolio adjustments than underlying fundamentals,'' said Gilmore at Foreign Exchange Analytics. ''There hasn't been any kind of corner turned in Japan regarding its banking system or prospects for growth.''
Rubles in Chicago
Meanwhile, currency traders in Chicago, frustrated by Russia's decision last week to halt trading in the ruble, set their own estimate of what the currency should fetch.
The new rate was set at 11.375 rubles to the dollar today by the Chicago Mercantile Exchange and the Emerging Markets Traders Association, based on a survey of currency traders at Russian banks and at Russian subsidiaries of international banks.
That's more than two rubles weaker than the 9.33 rate set by the Russian Central Bank and used mostly by hotels and other tourist-related businesses that are selling rubles. Organized currency trading has largely evaporated since the Moscow Interbank Currency Exchange suspended trading a week ago.
Elsewhere, sterling fell to $1.6734 from $1.6798 yesterday. The dollar was unchanged at 1.4425 Swiss francs and little changed at 5.8710 French francs from 5.8670 francs. It was also little changed at 1729.30 Italian lire from 1726 lire. The U.S. currency fell to 1.5520 Canadian dollars from 1.5673.
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