Currency dealers are alarmed by the failure so far of the US Federal Reserve and the Bundesbank to join the Bank of Japan in intervening to calm frantic trading at the end of last week.
The BoJ bought $5bn (pounds 3.17bn)-worth of dollars on Friday in an unsuccessful attempt to send the US currency back above 100.
Nick Knight, chief strategist at Nomura, said: ``This situation could be quite serious. The dollar's reversal will make people focus on the gloomier news for the rest of the year.''
The currency turmoil is on three fronts. First, if the dollar cannot resume its climb against the yen - propelled by successful joint central bank intervention in mid-August - the Jap- anese economy will come under renewed strain from its strong exchange rate.
Most analysts reckon both the Japanese and American authorities think this would be grave enough for them to do whatever it takes to keep the dollar from falling too far. Robin Marshall, chief economist at Chase Manhattan Bank, said: "There is a consensus among the central banks to keep the dollar higher. It is down to a question of tactics."
The Fed and Bundesbank are expected to help the Japanese authorities in joint intervention when they judge that investors are starting to take "short" positions - that is, selling dollars they have not yet bought in the expectation that the exchange rate will continue to fall. Intervention to push the dollar up is most effective at this stage. Since this could be at least several days away, the wait will prove nerve-wracking.
A second area of turmoil has been triggered by the mark's surge against other currencies in the European Monetary System. Theo Waigel, Germany's finance minister, set this off inadvertently with his view that Italy would not be ready to join European Monetary Union in 1997.
The central banks of Italy, Spain and Portugal intervened to support their own currencies. However, analysts said interest rate rises might be necessary to restore stability to them.
The French franc also fell against the mark last week, although by less than the traditionally weak currencies. Raising interest rates would be an extremely unwelcome option in France, but the franc looks likely to ride out the turmoil.
"This is not yet as serious as the pressure in the run-up to the French presidential election in May," said Ifty Islam, currency analyst at Merrill Lynch. He said the prospect of lower short-term interest rates in Germany would help the franc.
The third currency storm, the rush into Swiss francs at the expense of the mark, quietened on Friday. Investors who had feared that progress to a single European currency would weaken the mark were reassured by Mr Waigel's remarks. The Swiss National Bank had helped turn the tide with an interest rate cut on Thursday.Reuse content