Dollar surges again, to 5 1/2 -year high vs. yen Greenback also hits a 4-month high against the mark

January 03, 1998|By BLOOMBERG NEWS

NEW YORK -- The dollar rose to a 5 1/2 -year high against the yen yesterday and gained against the mark amid expectations the Japanese and German economies will continue to sputter in the new year.

Traders sold yen on concern that Japan isn't moving swiftly enough to spur consumer spending or keep more of its financial institutions from going bankrupt. Moreover, many of Japan's closest trading partners are being battered by slowing economies and plunging currencies.

"The yen is really suffering a confidence problem," said Stephen Flanagan, chief currency trader at Erste Bank in New York.

"People have lingering doubts about the Far East, and they're looking at the world and saying, 'If I've got to be anywhere, I prefer to be in the dollar.' "

The dollar rose to 132.58 yen, its highest since reaching 133 yen on May 12, 1992. It was the biggest one-day advance in four months, climbing from 130.54 Wednesday.

Last year, the dollar rose 13 percent against the Japanese currency, its best annual performance since 1989.

The U.S. currency also rose to a four-month high of 1.8071 marks. The dollar was recently quoted at 1.80475 marks from 1.7973 marks Wednesday.

Flanagan said he bought dollars at 1.8035 marks yesterday. In 1997, the dollar gained 17 percent versus the mark, its best performance since the dollar began trading freely in 1971.

The dollar also got a boost from expectation that investors will remain attracted to U.S. financial assets.

"The dollar is climbing on the back of a strong bond market," LTC said Robert Katz, a currency trader at MTB Bank in New York. "The U.S. has a strong economy with the absence of inflation, and that's attracting some flows into the dollar."

U.S. bonds rallied after a manufacturing report suggested that the economy might be cooling. Global investors snapping up U.S. financial assets need dollars to pay for them.

The dollar was aided by speculation that the worst isn't over for Japan.

Economists forecast that Japan's economy will grow only 0.6 percent this year, far below the 1.9 percent growth rate expected by Japan's Ministry of Finance.

Weakness in the economy pushed five financial institutions, as well as other companies, into bankruptcy since November. Some analysts reckon more will follow.

Comparatively high U.S. interest rates also help the dollar by luring investors. Japan's benchmark discount rate, at a record -- low 0.5 percent, compares with the U.S. federal funds rate of 5.5 percent.

"The economic picture in Japan is pretty gruesome, whereas the U.S. is a safe haven," said Tony Norfield, a treasury economist at ABN Amro Hoare Govett in London.

"The big question is, will the dollar go to 140?"

Adding to the yen's woes, tumbling currencies elsewhere in Asia could put the brakes on the region's growth and sap demand for Japanese exports. Because Asian countries are among Japan's biggest trading rivals, weakness in their currencies versus the yen makes their exports more competitive.

The dollar's gains might be capped by concern that the Bank of Japan will sell dollars for yen, as it did in recent weeks. Traders estimate that the central bank sold $10 billion last month to check the dollar's rise. The Ministry of Finance's Eisuke Sakakibara has warned that Japanese officials won't allow their currency to weaken further.

Also working against the dollar, a weaker yen has made Japanese goods cheaper in the United States, making this country's trade deficit soar and putting more dollars into the hands of Japanese exporters to sell for yen when bringing profits home.

The dollar's strength also has raised the ire of U.S. exporters.

Some traders worry that if the balance of trade keeps worsening, U.S. officials might soften their support for the dollar's strength.

"People are looking to see what's going to happen in the U.S.," said Ralph DelZenero, a corporate currency salesman at First Chicago NBD Corp. "They'll want to see what the Big Three automakers have to say" about the trade deficit.

U.S. Treasury Secretary Robert Rubin last month said he shared Japan's concern over the yen's weakness.

Against the mark, the dollar was boosted by concern that Germany's economic recovery might be faltering.

Bundesbank President Hans Tietmeyer suggested Wednesday that German interest rates would remain on hold for the time being.

Pub Date: 1/03/98

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