Dollar and euro jump as Fed caps yen

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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.

However, equity markets faltered yesterday, led lower by losses on Wall Street. The benchmark Dow Jones index closed down 191.55 points at 10,996, while the sharpest losses were registered in the hi-tech sector, with the Nasdaq index recording its biggest drop since mid-April, losing more than 3.5 per cent.

Analysts put the losses down to a combination of profit-taking, with computer giants IBM and Microsoft both falling following strong results on Monday, and general market jitters in advance of the half-yearly monetary policy report by the Chairman of the Federal Reserve, Alan Greenspan, tomorrow.

Analysts said the fall in share values partly reflected worries that their growth rates could not be sustained. There were divergent views, however, on whether the fall would continue. Mr Greenspan is expected to signal that there is at present no need for any further rise in interest rates, following the 0.25 per cent rise three weeks ago.

Yesterday's dramatic intervention in the forex markets was read as a signal that the Group of Seven leading countries wanted to set clear limits to the fluctuations in currencies. 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.

The 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 yen and dollar for a second day, climbing above $1.04 and 124. The pound fell to its lowest level for two months, ending at 66.28 pence to the euro. 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. He described a new European Commission report cutting the growth forecast to 1.7 per cent as "too low".