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The dollar will remain under strong selling pressure, as if in line with bearish U.S. stocks. Although macroeconomic indicators are still firm, the market tends to trade on stock prices.

The U.S.-selling is prevailing mainly because investors’ confidence in the stock exchange has fallen dramatically due to corporate accounting scandals and dubious stock activities involving high-ranking government officials.

This may herald a confidence crisis. The U.S.-selling may gain momentum, depending on trading factors. The distrust of the U.S. has entered a stage that needs close watching.

Given similarities between the U.S. and Japan in trends of stocks and economic indicators, there is a growing view in the market that the bubble implosion in the U.S. information technology sector will develop into a balance-sheet recession and deflation, mirroring Japan after its bubble burst in the early 1990s.

The Federal Reserve has begun discussing the risk scenario, reportedly studying countermeasures in detail using Japan as a negative example. Antideflation steps could include an expansion of fiscal spending, further credit easing and a weaker dollar.

Japan is nervous about the dollar’s weakening against the yen. But any rebound of the dollar will probably be limited, because dollar-selling pressure remains strong and the finance minister’s careless remarks have diminished the effects of dollar-buying intervention.

Many institutional investors point to Japan’s superiority in relation to the growing distrust of the U.S.

Japanese assets are considered relatively safe and attractive. Since Japan has continued balance-sheet adjustments over the past 10 years, negative legacies from the IT bubble collapse are relatively small, and the current account remains stably in a surplus.

There is a growing consensus that Japan’s currency intervention will be limited to “smoothing operations” as long as the yen rise is backed by factors originating in the U.S. Many exporters and institutional investors, who see yen-selling intervention as a prime opportunity to sell dollars, are yearning for such intervention.

If the dollar bounces back after intervention, it will face very strong selling pressure at the 118.20-119.00 yen level. For the month to come, the dollar will probably be traded between 113 yen and 119 yen.

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