Dollar Falls vs Yen After Rubin Comments on Weak Yen; Declines vs Mark
Dollar Falls vs Yen After Rubin Comments on Weak Yen (Update1) (Adds detail on Long-Term Capital in 6th paragraph, currency impact on Coca-Cola Co. in 2nd section. Updates rates.)
New York, Sept. 28 (Bloomberg) -- The dollar fell against the yen, erasing earlier gains, after Treasury Secretary Robert Rubin said the U.S. is concerned about weakness in the Japanese currency, down 4 percent this year.
The dollar also fell against the mark on expectations U.S. Federal Reserve policy-makers will cut the benchmark interest rate tomorrow, reducing traders' incentive to buy dollars.
Traders sold dollars for yen after Rubin said in Washington that ''a great concern of ours and one that has been shared by the Japanese government is the weakness of the Japanese yen.'' ''Does that mean we're going to support the yen again? That's surely what a lot of banks are thinking,'' said Michael Casey, who manages $400 million in bonds at Federated Investors. ''So they're going to sell a few bucks and see what happens.''
In late New York trading, the dollar fell to 135.90 yen from 136.15 Friday, after rising as high as 136.89 yen earlier on news that Japan's second-largest leasing company went bankrupt. The dollar fell to 1.6754 marks from 1.6790, though it is still up almost 1 percent from a 19-month low it hit Friday.
Some investors and traders also sold dollars today on concern that Long-Term Capital Management LP, the troubled hedge fund, may need to sell dollars for yen in order to pay back loans, said Casey. Banks and securities firms put together a $3.5 billion aid package for the fund last week after $4 billion in losses prompted the Fed to orchestrate a rescue.
The U.S. and Japanese governments jointly sold an estimated $6 billion June 17 to prop up the yen, which sank to an eight- year low the previous day. That move came on the eve of a trip to China by President Bill Clinton. Chinese officials said the yen's weakness -- which makes Japan's exports cheaper -- was making it harder to keep the yuan from declining.
Japan competes in the trade arena with many Asian countries that also rival China.
In recent years, Rubin and Deputy Treasury Secretary Lawrence Summers have made similar comments about yen weakness, even when the dollar was as low as 125 yen.
Trade-Weighted Strength
Officials in Japan have reason to oppose the yen's weakness because it can lower the attractiveness of Japanese equities and bonds. Meantime, the dollar's strength is a bane to some U.S. companies because it increases the price of exports and can erode the value of overseas earnings.
Coca-Cola Co., the world's largest beverage company, forecast lower-than-expected earnings for the second half of the year in part because of the dollar's strength against many major currencies.
The company expects the strong dollar will trim between 9 percent and 10 percent off earnings this year, according to Bill Hensel, a company spokesman. Coca-Cola uses hedges to lock in the dollar's value and protect itself from unexpected swings, mainly against the yen, mark and British pound.
Typically, the company has been able to limit any negative foreign exchange impact on earnings to no more than 3 percent over time, he said. ''But this year, the dollar's movement has been so strong versus other currencies.''
When measured against the currencies of some of the country's biggest trade rivals, the dollar rose to its highest level in 9 years in August. According to Finex's dollar index, which measures the dollar against the currencies of 10 of the U.S.'s biggest trading partners, rose to 102.88 on Aug. 17.
While the June intervention knocked as much as 13 yen off the dollar's value in ensuing days, the U.S. currency rebounded within two months, setting an 8 1/2-year high Aug. 11.
FOMC
The dollar also gave up early gains versus the mark amid expectations that Fed policy-makers meeting tomorrow will lower the benchmark rate for overnight borrowing between banks.
Lower interest rates would diminish the appeal of deposits and bonds denominated in the U.S. currency, so the dollar may decline in the immediate aftermath of a rate cut, said Ben Strauss, a currency trader at Bank Julius Baer.
Still, lower rates can spur economic growth by making it cheaper for individuals and companies to borrow money. That could boost the dollar down the line, Strauss said.
The yen was dragged down earlier after Japan Leasing Corp., an affiliate of the troubled Long-Term Credit Bank of Japan Ltd., filed for court protection yesterday, with total liabilities of 2.4 trillion yen ($17.7 billion), becoming the country's largest postwar bankruptcy.
The financial failure offset optimism the government will be able to quickly resolve the crisis affecting Japanese banks, which are weighed down by as much as $1 trillion in bad loans.
The yen got support, nonetheless, from news that the ruling Liberal Democratic Party and opposition groups reached a compromise today allowing the government to take over insolvent lenders and provide taxpayer money to healthy banks.
Many traders sold yen last week as political parties disagreed over the interpretation of an agreed-upon bank reform compromise.
German Elections
The dollar gained earlier against the mark on speculation that German Chancellor-designate Gerhard Schroeder would appoint a government that is less business friendly than its predecessor.
Schroeder's Social Democratic party was the victor in yesterday's national elections, ousting Helmut Kohl and the Christian Democratic Party after 16 years in power. ''We know Kohl and though he wasn't going to be massively positive, it's better the devil you know,'' said Helena Morrissey, who helps manage 12 billion pounds ($20.4 billion) at Newton Investment Management in London. ''Schroeder is a bit of an unknown quantity.''
Schroeder today said he would start talks with the environmentalist Green Party to form a left-of-center coalition, fanning speculation the new government may favor higher taxes and more regulation of businesses. ''Until they form the coalition, there are a lot of question marks,'' said Bruce Giammattei, a senior currency trader at Mellon Bank in Pittsburgh. ''We've seen the mark weaken on that.''
According to Chris Widness, an international economist at Chase Securities Inc., the Greens favor controls on business operations and high taxes to dampen consumption. The election ''may weigh on business investment plans,'' he wrote in a report.
Elsewhere, the British pound rose to $1.7065 from $1.6977 Friday. The U.S. currency was little changed at 1.3883 Swiss francs from 1.3863 francs. It fell to 5.6192 French francs from 5.6275 francs and was little changed at 1658 Italian lire from 1659.40 lire and at 1.5100 Canadian dollars from 1.5127 dollars.
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