The dollar’s slide remains unstoppable. After U.S. President George W. Bush remarked that the unit’s value should be determined by market forces, the currency rapidly plunged below 120 yen, despite the Bank of Japan’s market intervention.
The dollar is losing ground not only against the yen but also the euro — a situation that should thus be labeled “dollar-selling” instead of “yen-buying.”
It has been triggered by various factors, including renewed fears over a fresh wave of terrorism, accounting scandals involving U.S. firms, and the prospect of a “twin deficit” revival, prompting investors to reroute funds that used to be focused on the U.S.
Since recent dollar-selling activity can be traced back to events in the U.S., it is unlikely that the trend will be easily reversed for the time being.
But it is possible that market players will turn to the euro, if not the yen, as they proceed with their dollar selloff.
We should at least realize there is still a gap in the economic fundamentals of Japan and the U.S. In fact, recent data on U.S. durable goods orders and new housing sales for May, as well as the June factory output index, proved stronger than anticipated.
True, the widely anticipated “V-shaped” U.S. economic recovery hasn’t happened, but its underlying trend still points upward.
Meanwhile, the BOJ “tankan” survey released Monday illustrates a more rosy picture of Japan’s economy than was previously predicted, although the data have apparently failed to inspire any optimism for the future.
Domestic capital investment plans by Japanese firms have been revised downward, while the tankan does not necessarily reflect the yen’s appreciation and the share price slide that occurred in the weeks just before its release.
The public’s economic sentiments appear to differ from that of the government, which has declared that the economy has bottomed out.
It is possible that funds will start flowing into Japan as investors bargain-hunt Japanese shares. But once they complete cross-border diversification of their funds and again look to economic fundamentals for direction, the likelihood of a sharp yen appreciation may dwindle, partly due to large-scale market intervention by the BOJ.
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