Dollar's levels raise concerns
Recent slide prompts BOJ intervention
By Julie Rannazzisi, CBS MarketWatch
Last Update: 10:15 AM ET Jan 12, 1999
NewsWatch
NEW YORK (CBS.MW) -- If you want to get an idea of how the Treasury market is
performing these days, just glance at dollar quotes. Tuesday, the Bank of Japan's intervention
to prop up the fledgling greenback brought out Treasury buyers
That wasn't the case in recent weeks. In fact, the greenback has been falling like a stone
against the yen, reaching 28-month lows Monday, accentuating concerns among market
players that Japanese investors will stampede out of dollar-denominated assets. It's an issue
that has put Treasurys under the gun in the past month and one that strategists say will not
dissipate quickly.
The bloodletting was temporarily halted in overseas dealings at
the hands of the BOJ, which intervened in currency markets to
sell yen and buy dollars in order to shore up the stagnant
greenback. It was the first effort of this kind in almost 3 1/2
years.
Dealers said the BOJ intervened below 110 yen and that its
purchases were in the neighborhood of $2 billion. Dollar/yen was
recently at 111.66 after reaching a high of 112.80. In late New
York trading Monday, the dollar plunged 2.1 percent to 108.55
after falling as low as 108.25. See currency updates.
Primark Decision Economics indicates that the market views a
dollar/yen level of 110 as the Japanese government's desired
floor for the greenback.
Mike Ryan, senior fixed-income strategist at PaineWebber, said
he believes the dollar's gains Tuesday aren't sustainable. Coming
from extremely oversold conditions, a dollar bounce back was
inevitable, he said. The BOJ's intervention is seen as the
catalyst for a short-term upward move, and not a turnaround.
Strategists believe the dollar's downtrend could end if the currency is able to pierce 113.40
against the yen, but the breach of that key resistance level is seen as unlikely at this juncture.
The 30-year benchmark bond (TRE=Z3-GB) took heart in the dollar's rise, after slumping so
badly under the weight of the sagging dollar recently. The bellwether 30-year advanced 1/2 to
yield ($TYX) 5.278 percent. See Bond Report.
Worries of Japanese selling
The bond market is hugely worried that Japan -- the largest holder of U.S. debt -- will bail out
of U.S. assets big time. And rightfully so.
Tony Crescenzi, chief bond market strategist at Miller, Tabak, Hirsch & Co., notes that from
1995 to 1997 the dollar advanced approximately 25 percent and foreigners bought a net
average of $170 billion in government securities each year. But as the dollar entered a slump
in late 1998, net foreign purchases skidded to a relatively puny $13.4 billion, according to
Crescenzi. The figures clearly show that foreigners quickly abandon the assets of a country
plagued by a sliding currency.
But why has the yen been gaining so much ground recently?
Players said it's largely attributable to the dramatic rise in Japanese government bond yields in
the latter part of 1998. In fact, Japan's 10-year yield soared to 2.01 percent on Dec. 30, 1998
compared to a low of 0.67 percent reached at the start of October 1998. And the differential
between yields on 10-year U.S. Treasurys and 10-year Japanese bonds, currently at around
314 basis points, has fallen to historically low levels.
"(The rise in JGB yields) will continue to pressure the dollar (vs.) yen as the 10-year spread
has come in so much," said Allison Montgomery, currency economist at I.D.E.A. in New
York.
Montgomery said that while off-shore investments will continue to remain attractive to
Japanese investors, there will also be more scope for money to stay home. And with Japan's
fiscal year-end drawing near on March 31, the market may witness more repatriation of
Japanese funds, she noted.
John Lonski, chief economist at Moody's Investors Service, said the U.S.' huge trade deficit
with Japan is finally beginning to be reflected in exchange rates. Japanese exporters,
suffocated by a glut of dollars, no longer are willing to hold these dollars or invest them in
U.S.-denominated assets.
Market strategists also assert that the richly valued U.S. equity market is also making
Japanese investors extremely skittish. Budding technology stocks continue to lift the overall
market, bringing the Nasdaq to new records. Tuesday, stocks fell, with the Dow Jones
Industrial Average off 57 points. See Market Snapshot.
Analysts said the shift from U.S. assets to pursue other investment opportunities -- such as
euro-denominated stocks and bonds -- isn't a fad that will be reversed overnight. Thus, look
for some rocky rides along the way. The greenback slid 14.3 percent in 1998, or nearly 19
yen, beginning the year at 132.40 and ending at a shabby 113.50.
Yen's levels worries Japanese officials
Speculation of imminent intervention had been circulating in the market for days, as Japanese
officials voiced their worries regarding the yen's lofty levels.
In fact, the yen's recent revival comes at the most inopportune time as it hampers the recovery
of Japan's moribund economy by making Japanese exports more expensive to the rest of the
world and eating away at company earnings.
Chief Cabinet Secretary Hiromu Nonaka, speaking before the press Tuesday, said that
"Neither excessive yen strength nor yen weakness is good for the world economy," according
to the Japanese newspaper Nihon Keizai Shimbun. His comments hit wires after the BOJ's
intervention was confirmed.
In recent days, Vice Finance Minister Koji Tanami had suggested Tokyo's readiness to step in
and curtail the greenback's plunge.
The U.S. currency is also getting hit by recent worries that Brazil won't be able to get its
fiscal house in order, which could seriously jeopardize the disbursement of monies from the
International Monetary Fund. Talk circulated Friday that Brazil's Finance Minister Pedro
Malan would resign, fueling a furious selling in Brazilian shares. The Bovespa sank 5.58
percent Monday.
In their morning notes, Pierre Ellis and Cary Leahey of Primark Decision Economics indicate
that Japan and Brazil continue to be the "two major land mines."
"While Japan is the much more important economy and the biggest risk out there, investors
have developed a sense that ...the Fed is prepared to lower rates to make sure Brazil does not
become the latest victim of the Asian contagion.," Ellis and Leahey wrote. Thus, recent
problems in Brazil have been dollar-negative.
The dollar and the U.S. economy
If a currency reflects the underlying fundamentals of a country, why would the U.S.'s
currency lose ground against the yen? After all, the U.S. economy pounded out an astounding
378,000 jobs in December while Japan saw its gross domestic product contract by 0.7 percent
in the third quarter and fall a whopping 3.5 percent on a year-over-year basis.
Lonski, the Moody's economist, said the yen's rise reflects the fact that things aren't getting
any worse in Japan, and not that they've gotten any better yet.
Meanwhile, the stumbling dollar will give a lift to U.S. exports, which, players note, goes
against the need for a rate cut from the Fed to spur U.S. economic growth.
"The dollar's slide will bring higher import prices and stronger manufacturing by mid-year; a
7 percent drop in the dollar equals to 100 basis points in rate cuts," Crescenzi remarked. And
that's another reason Treasurys are getting hammered. |
