Dollar rockets as world central banks intervene

Stock markets see-saw amid currency volatility as companies try to assess impact on earnings

PAUL WALLACE

Economics Editor

The dollar soared on foreign exchange markets following the first co- ordinated intervention by the US, Japanese and German central banks for almost three months.

The pound had a good day, strengthening by three pfennigs against the mark to close at its highest rate for five months, and raising hopes that there will be no rise in interest rates.

The dollar's extraordinary rise took it up by 3 yen to close at Y96.61 and by 4 pfennigs to close at DM1.4724 . The pound fell back two cents against the dollar but surged against the mark to end above DM2.29 in late London trading. The trade-weighted exchange rate closed at 85, its highest level for nearly three months.

Lee Ferridge, currency strategist at NatWest Markets, said: "While some general consolidation is likely in the immediate term, the market will be targeting dollar rates of Y100 and DM1.50 over the next couple of weeks."

But the dollar boost killed off hopes of an immediate cut in US interest rates and lowered the Dow Jones Industrial Average by more than 44 points at one stage. That gloom spilled over to the London equity market where the FT-SE 100 ended up three points at 3,444.4 after showing a gain of more than 15 points earlier in the day.

Key features of the central bank intervention, in which the Swiss National Bank also participated, were its show of unity and the strategy it revealed of rewarding those buying the dollar and creating risks for those speculating against it.

Avinash Persaud, head of currency research at JP Morgan, said: "This intervention is very different from previous episodes and it will succeed because of that." Instead of trying to fight a decline in the dollar, the central banks were repeatedly reinforcing the rise in it. "By rewarding dollar bulls, they have turned the dollar psychology round," he added.

The dollar first burst through a key technical support level of Y94.60 - established by the five-year trend line of the yen against the dollar - in early morning trading in London. This followed overnight intervention by the Bank of Japan, which had purchased dollars at Y93.60 after a slight dip in dollar strength.

Dealers were also encouraged by the fall in Japan's trade surplus from $11.6bn in June to $9.4bn in July.

The dollar was further supported by remarks by the vice-chairman of the US Federal Reserve, Alan Blinder, that he was not in favour of further rate cuts unless the economy fell back. Since Mr Blinder is the leading dove for monetary easing, this suggested there was virtually no prospect of an interest rate cut at the Fed's Open Market Committee meeting on 22 August.

But it was the early afternoon announcement by the notoriously skin-flint Bundesbank that it, too, had committed resources to purchasing the dollar that set the market alight. The dollar smashed through a key support level at DM1.45 to make huge one-day gains against the mark, taking it to a six-month high.

The overnight intervention by the Bank of Japan was seen as important because of the signal it conveyed to Japanese investors in particular that there is little risk of a relapse in the dollar. Huge currency losses have been incurred by Japan in foreign investments made since the mid- Eighties. If, however, investors can be convinced that the yen will not rise, there is an obvious attraction in gaining the 5 per cent extra interest on offer by investing in the dollar money market.

The Bundesbank intervention was considered even more pivotal because it had not been involved in the episodes of joint intervention staged by the US Fed and the Bank of Japan since the cuts in interest rates in early July. Furthermore, it was conducted in conjunction with additional intervention on the part of the Bank of Japan and together with the US Fed.

The weaker yen seems likely to encourage a further surge in the Tokyo stock market. The Nikkei 225 index rose 3 per cent to a 24-week high of 17,452 yesterday with heavy foreign investment in electricals and heightened domestic buying.

Comment, page 17

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