The dollar continued to fall against the Japanese yen yesterday as traders bet that investors will shift more funds to Tokyo on the basis of a rosier outlook for Japan's economy.
The dollar broke through the 109 yen to the dollar barrier and briefly traded close to its low for the year, reached in January, of 108.22 yen. It rebounded late in the day to close at 109.14 yen but was still below Tuesday's close of 109.69.
The U.S. currency also fell against the euro, with the European currency buying $1.0582, up from $1.0566 late Tuesday.
Economists and traders said the dollar's descent in the past few weeks--from about 125 yen in late May--is the result of changing global economic conditions, with the outlook improving in Japan and other Asian countries and the prospect of higher interest rates and slower growth in the United States.
The improving economic fortunes in Japan, which now shows signs of recovering from years of stagnant or negative economic growth, is drawing investment away from the United States toward Japan. To buy Japanese stocks, foreigners need to exchange their dollars for yen; the selling of dollars drives down its price.
"The downtrend has been in place for a good two months and it's really been building some steam," said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi in New York. "At the moment, the fundamentals are against the dollar."
Moreover, some traders cited the lack of intervention by the Bank of Japan to stop the move. Earlier this summer, the central bank was selling yen and buying dollars in an effort to keep the yen from rising too fast and making Japanese exports so expensive that they would become less competitive. But despite comments by some Japanese officials recently hinting that there would be more intervention, traders betting on the dollar's decline have become emboldened as the Bank of Japan has stayed on the sidelines.
Traders said there was no panic in the selling of dollars, noting that most financial markets have been in a pre-holiday mood as Labor Day approaches.
U.S. manufacturers would welcome a weaker dollar because it would make American exports more competitive as they became cheaper for foreign consumers. But some economists worry that, because a weaker dollar means foreign investors are pulling their money out of U.S. investments, the trend could drive U.S. interest rates higher as the country competes harder for investment money from around the globe. The United States needs to borrow a considerable amount from overseas to pay its skyrocketing bill for imports, which is projected to exceed revenue from exports by more than $200 billion this year.
"The broad macro issue is pretty simple," said Goldman Sachs & Co. economist Ed McElvey. "We're running a very large current account deficit"--the broadest measure of the degree to which imports exceed exports.
"It's not like there is some magic value to the dollar," McElvey said. "But a large current account deficit is symptomatic of U.S. consumers and businesses spending more than they're earning."
U.S. Treasury officials, in an effort to maintain foreign confidence in U.S. financial markets, have long repeated the mantra that a strong dollar is "in the U.S. interest." Some traders have questioned whether Treasury Secretary Lawrence H. Summers has as strong a commitment to a strong greenback as his predecessor, Robert E. Rubin. But yesterday Summers reiterated that position in an interview with USA Today: "Our policy is unchanged. A strong dollar is very much in the U.S. national interest."
CAPTION: (This graphic was not available) Still Sliding