Dollar and euro jump as Fed caps yen

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The Independent Online
THE DOLLAR and euro both jumped on the foreign exchanges yesterday after the Federal Reserve Bank of New York intervened to cap the yen. The Bank of Japan confirmed the intervention on its behalf, the latest in a series of moves to prevent the yen strengthening enough to threaten Japan's hopes of economic recovery.

The dramatic step was read as a signal that the Group of Seven leading countries wanted to set clear limits to the fluctuations in the currency markets. The European Central Bank had carried out an earlier bout of intervention.

"There is a G7 policy to prevent the yen from strengthening," said Nick Stamenkovic, an analyst at IDEA.

Stephen Lewis, chief economist at Monument Derivatives, said the financial markets had now got the message that the authorities would not allow the Japanese currency to climb past 118 to the dollar. "The Bank of Japan can go on like this for as long as it takes, and certainly until some of the foreign enthusiasm for the yen abates," he said.

Yesterday's exchange rate moves were reinforced by news of a record US trade deficit in May. Trade in goods and services was in the red by $21.3bn, up from April's $18.6bn.

The dollar jumped more than 1 yen to reach as much as 119.68 when the New York Fed started buying dollars at the 118 level. The euro gained against both yen and dollar for a second day, climbing above $1.04 and 124 during the day. The pound fell to its lowest level for two months, ending at 66.28 pence to the euro. Its index against a basket of currencies fell 1.0 to 102.9.

Sentiment towards the single currency in the markets seems to be improving. It was boosted yesterday by the key Ifo survey of German business conditions showing a bigger than expected jump in June.

Werner Muller, the German economics minister, said growth this year would turn out to be stronger than predicted. Mr Werner described a new European Commission report cutting the growth forecast to 1.7 per cent as "too low".

The "business climate" index rose to 92.9, its highest this year, from 90.5. The index of current conditions rose for the first time in 12 months, and expectations of future conditions improved for the fourth month running.

There was good news elsewhere in Euroland, with figures showing a pick- up in May in the growth of Spanish industrial output. It had tapered off early this year.

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