Dollar resumes upward climb

The dollar returned to its recent highs against the yen yesterday, driven by hopes of lower interest rates in Japan and fears that US rates might not fall as fast as expected.

According to a leaked draft of its forthcoming World Economic Outlook, the International Monetary Fund is recommending a further reduction in Japanese interest rates.

It says there is room for another cut, with the economy in its ''worst shape'' for 50 years. The Bank of Japan cut the official discount rate to a record low of 1 per cent in April.

The IMF has slashed its predictions for GDP growth to 0.4 per cent in 1995 and 1.5 per cent in 1996 - although, unlike the final forecast in October, this does not take account of the yen's recent fall.

Statistics out yesterday confirmed the international organisation's gloomy analysis. The unemployment rate in July stuck at its record high of 3.2 per cent.

Separate figures showed supermarket sales in the same month were 2.7 per cent lower than a year earlier.

The Japanese finance minister, Masayoshi Takemura, said another package of measures to stimulate the economy would be announced around 20 September.

On the other hand, new figures for the US indicated that there was still a strong head of steam powering the economy. The Federal Reserve cut short- term interest rates by a quarter point at the beginning of July but hopes for a follow-up reduction are fading.

The number of new homes sold in the US in July increased unexpectedly to an annual rate of 715,000, the highest level since March 1994. This is the third consecutive monthly increase, and one that reflects reductions in mortgage rates.

A separate report from the Conference Board showed that consumer confidence had slipped in August from the July level, which had been revised up. The business organisation warned that US inflation would edge towards 4 per cent next year because of wage pressure in the healthy American jobs market.

Contrasting interest-rate prospects in the two countries explained the dollar's gains yesterday. ''There is an underlying demand for dollar assets by the Japanese institutions,'' said Steve Barrow, currency economist at Chemical Bank in London. ''There is no reason at all to keep funds in Japan.''

The US currency had reached 97.75 - its highest for nearly two weeks - by noon in New York yesterday. It also rose against the German currency, trading above DM1.47.

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