The yen soared to a three-year high against the U.S. dollar yesterday, after Japan released better-than-expected numbers about its troubled economy.
According to overnight reports from Tokyo, Japan's central bank intervened in the market in a effort to halt the rise, out of fear that it would damage Japan's tentative recovery from a decade of economic malaise.
The effort appeared to be working--by late morning Friday Tokyo time, it took 109.92 yen to buy a dollar, 1.08 yen more than it had taken there the previous day.
A senior U.S. policymaker appeared to signal that the United States was not sufficiently worried about the yen and the resulting decline in the dollar to join in any intervention. William McDonough, president of the Federal Reserve Bank of New York, said, "I don't believe the change in the dollar-yen exchange rates has particularly significant implications for the U.S. economy," Reuters reported.
A Treasury Department spokeswoman declined to comment.
In late trading yesterday in New York, it took only 108.06 yen to buy a dollar, about 3 percent less than the previous day.
The yen has been headed up all summer, despite periodic intervention by the Japanese central bank. Japanese authorities worry that the strong yen, which tends to make their country's goods more expensive to foreigners, will crimp exports and shut off a recovery.
But it is that very recovery that has fueled much of the rise--over the long term, currencies tend to rise and fall based on fundamental strengths and weaknesses in their home countries.
In the first quarter, Japan's economy expanded by 2 percent, a rare flash of good news since the collapse of a "bubble" economy of the late 1980s.
Yesterday, Japan's Economic Planning Agency reported that gross domestic product expanded by 0.2 percent in the second quarter. While hardly a stellar rate, it reversed expectations in financial markets that the figure would be negative.
So yesterday investors bought yen in expectation it would rise in value, and their purchases helped make that a self-fulfilling prophecy.
The Clinton administration has long been on the record as favoring a strong dollar, saying it yields such benefits as keeping inflation down. In a speech Wednesday, Treasury Secretary Lawrence H. Summers reiterated that stance, saying that "a strong currency is in our national interest."
But the United States treats currency market intervention as a last resort. It is a complex operation that has uncertain impact.
Though the dollar is now at a three-year low against the yen, the dollar remains relatively strong against the euro, the collective currency used by 11 European countries, and gained against the euro slightly in trading yesterday.
Moreover, economists here viewed yesterday's fluctuation as a rise in the yen, not a fall in the dollar caused by some deterioration in the U.S. economy.
"I think what's going on is that basically the dollar-yen relationship is trading off either real or anticipated changes in the Japanese economy," Bridge News reported McDonough as telling reporters following an address in Buffalo.