Last week’s U.S. Federal Reserve report on stagnant regional economic conditions has weighed on the dollar’s value.

The dollar has fallen below 122.80 yen — a strong support level on the chart — and is now hovering around 120 yen.

Given the ailing Japanese economy, however, an unchecked dollar fall against the yen appears unlikely.

I assume the dollar will move between 119 yen and 124 yen in the near term.

Despite a U.S. industry outcry against a strong dollar, U.S. Treasury Secretary Paul O’Neill was quoted recently as saying the United States remains committed to a strong dollar policy.

The Japanese government meanwhile conceded in a monthly report late last week that the economy is deteriorating, revising its assessment downward for the first time in two months.

Against this backdrop, the Bank of Japan decided earlier this week to ease its grip on credit further.

In response to the BOJ’s surprise move to funnel more money into the banking system, the Tokyo stock market rebounded strongly, but the upturn soon fizzled.

In its Aug. 8 editions, the Financial Times said the Japanese government is “willing to tolerate a weaker yen.”

The paper quoted Finance Minister Masajuro Shiokawa as saying in an interview with Kyodo News that “the Bank of Japan should implement further credit-easing, partly to weaken the currency.”

Finance Ministry officials often tried to talk up the yen when the dollar topped the 125 yen level last spring. Recently, however, the dollar’s fall toward 120 yen has prompted them to caution against speculative yen buying.

Following a spate of dismal U.S. economic reports, including the National Association of Purchasing Management’s monthly index for July and job data, the Fed is now widely expected to lower its key interest rates by a quarter of a point at its policy-setting meeting Tuesday.

Still, worries also linger over economic prospects in Japan.

Given a slump in both consumer spending and business fixed investment, a preliminary report on gross domestic product for the second quarter, due out Sept. 7, appears likely to confirm negative growth again.

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