Advancing dollar bucks the trend

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The Independent Online
THE dollar will resume its advance against the yen and other currencies after last week's setback, according to foreign exchange experts. A majority expect it to pass the Y100 barrier within the next fortnight, according to a regular survey of investors carried out by economic consultancy Idea.

Mixed figures on the US economy published on Friday left Wall Street uncertain about whether the Federal Reserve will reduce interest rates again. A bigger than expected rise in employment of 249,000 last month took the dollar up before a weak survey of manufacturing activity took it back down. It ended the week at Y97.38 and DM1.4636.

Steven Hannah, head of research at IBJ International said: ''It is not clear whether the economy is really regaining enough momentum to completely rule out another interest rate cut.''

The uncertainty was compounded by Fed chairman Alan Greenspan. Speaking at a conference in Jackson Hole, Wyoming, he expressed doubts about whether plans to cut the federal budget deficit would succeed, and failed to repeat an earlier statement that he would stand ready to reduce interest rates if spending cuts were approved - an omission seen as potentially significant in the coded language of central bankers.

Along with the new consensus that American interest rates are unlikely to fall, expectations of lower rates elsewhere - particularly Japan - will underpin the dollar, analysts said. Last week's collapse of the Kizu credit union and Hyogo Bank and the fragile state of the Japanese economy mean financial markets expect another reduction in Japan's official discount rate from its current record low of 1 per cent. Disappointment that there was no immediate cut last week was one reason for the dollar's setback.

There are also wide expectations of further deregulation of the Japanese economy, such as tax reform, and an extra boost from public spending in the supplementary budget due on 20September.

In addition, economists are convinced that if there were any sign of the yen rising persistently, central banks would intervene.

The Idea survey showed that the median prediction for the dollar's level in two weeks' time is Y100 and DM1.49. The range for estimates of the dollar's high this year is Y100-115.

The survey revealed that most of the investors expect another reduction in German interest rates by January. This is expected to underpin the dollar's exchange rate against the mark.

However, not all City experts share the optimistic view about the US currency. Chris Turner, an analyst at brokers BZW, said: ''Japanese policy measures could disappoint the markets, and setbacks in the US budget process would hit the dollar. I cannot see it being sustained above Y100 until next year when there has been clear progress on the budget and trade deficits.''

Hamish McRae, page 4

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