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. Last Updated: 07/27/2016

Dollar's Surge Stops Short of 100 Yen

LONDON -- The dollar paused for breath Wednesday after a dizzying rise, stalling before it regained 100 yen or 1.50 Deutsche marks, as analysts said the currency's strength improved prospects for global economic growth.

The U.S. unit, boosted by surprise concerted intervention by the banks Tuesday, hit six-month highs of 99.05 yen and 1.4930 marks in Asian trading but gave back some of its gains later when traders cashed in some profits.

In late European business the dollar traded at 97.69 yen, compared with 96.61 a day earlier, and at 1.4762 marks versus 1.4724. The levels were up seven pfennigs and six yen from a week ago, despite slipping from their highs.

The dollar's big jump Tuesday -- of more than three yen and four pfennigs -- came as the U.S., Japanese, German and Swiss central banks coordinated to buy as much as $4 billion. Foreign-exchange experts said the unusually large size of the intervention underscored that the purpose was not so much to aid the dollar, which was already steadily gaining ground, as to reduce the value of the yen and mark to give the lagging Japanese, German and other Western European economies a needed boost.

"There are strong economic reasons for policy-makers in Germany and Japan to want their currencies to fall," said Mickey Levy, chief financial economist at NationsBank in New York.

Tuesday's actions showed the countries "really mean business. They are serious because they have no other choice," said Scott Pardee, senior adviser at Yamaichi International (America) in New York who oversaw currency interventions when he was an official at the Federal Reserve Bank of New York.

The Japanese economy is mired in a recession and its banking system is under tremendous strain because of enormous loan losses.

The rapid appreciation of the yen earlier this year priced many Japanese goods out of world markets. That aborted an expected recovery, adding to the banks' woes.

"Time is running out, and the fastest thing to do is to reverse the yen's rise to help exports," Pardee said.

In Germany, the rising mark had a similar but more-muted impact on exports. There as well, forecasters have been trimming the expectations for growth at a time when German unemployment remains at very high levels.

Several other European nations, including France, have tied their currencies closely to the mark. The German currency's rise forced them to raise interest rates in order to attract foreign investors to buy their currencies. The higher level of interest rates has hurt those countries' growth.

"This is a rectification. There was a sort of currency imbalance, packed with U.S.-Japan confrontation," said Dresdner Bank chief economist Klaus Friedrich.

"The global weather outlook now looks very good with the exception of a few local storms," he said.

A senior U.S. Treasury official, speaking to a small group of reporters in a telephone conference call and insisting on anonymity, said Tuesday's coordinated intervention was in keeping with the sentiments expressed in an April communique by finance ministers from the Group of Seven industrialized nations -- the United States, Japan, Canada, France, Germany, Italy and Great Britain.

That statement, which many analysts dismissed at the time as vague and inconclusive, contained general language suggesting the ministers were willing to take steps together to reverse the dollar's decline. But the statement included no hints as to what action G-7 authorities might pursue, and neither did it suggest the level to which they wished the dollar to recover.

From the U.S. point of view, a healthier Japanese economy could help avert a banking crisis that could have a major impact on the world financial system.

Beyond that, faster growth in Japan and Europe could improve demand for U.S. exports in both areas and help restore moderate economic growth in the United States. At the same time, a stronger dollar means that prices of imported goods, which rose more than 6 percent in the past year, will rise less rapidly and help hold down U.S. inflation. Pardee also said a stronger dollar "makes it easier for the Fed to cut interest rates. All around, it's a win-win-win situation to have the dollar stronger."

(Reuters, WP)