The US currency fell for four days, dropping below 120 yen and reaching its lowest levels since January amid persistent speculation that the central banks of the US, Japan and Germany are poised to sell dollars in an effort to halt its two-year rally.
"The more it goes down, the more chance there is of intervention," said Jeremy Hawkins at Bank of America. "As far as [Japanese officials] are concerned, the dollar's been too strong for a while. People are taking a whack.''
Mr Greenspan spurred more dollar selling when he said in a speech on Thursday that "there's scant evidence of any imminent resurgence of inflation". His comments dampened expectations of further Fed rate increases - which tend to help the dollar by luring investors to US bank deposits.
At one point the dollar fell to 119.05 yen and 1.6888 marks - well down on its four-year high of 127.5 yen on 1 May.
In Japan, Finance Minister Hiroshi Mitsuzuka said the Bank of Japan may sell dollars if the yen's fluctuation becomes too extreme. But with top Japanese officials having threatened to sell dollars repeatedly in recent weeks without actually doing so, traders are growing sceptical that the BOJ actually will enter the market. Moreover, the dollar's 4 per cent descent against the yen this week lessens the need for action.
A strong dollar helps Japan by making Japanese exports cheaper in foreign currency terms. It benefits the US by helping limit inflation. That has prompted many traders to doubt whether the US and Japanese governments want the dollar much lower.
"If they do intervene, it will be a free-fall for the dollar to 105-110 yen," said Shinya Nambu, head of currency trading at Bank of Tokyo-Mitsubishi. "No one among US and Japanese officials wants to see that. I think both governments want the dollar around 120 yen."
US Treasury Secretary Rubin said on Friday that the US policy that a strong dollar was in the country's best interest "has been right".
The selling spilled over into sterling which fell against major currencies with the dollar. If the dollar's long rally were to end, sterling would also fall steeply. This would give exporters some breathing space and greater freedom to the newly independent Bank of England to push interest rates higher if domestic demand warrants it. Copyright: IOS & BloombergReuse content