ECB in first forex market intervention

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The Independent Online
THE EUROPEAN Central Bank intervened on the foreign exchanges in a surprise move ahead of the Group of Eight summit in Cologne yesterday, selling yen for euros on behalf of the Bank of Japan.

It was the third time this month that the Japanese authorities have intervened to keep the yen from strengthening. Yesterday's move had the helpful side- effect of strengthening the euro too.

The ECB confirmed that it was the first time it had intervened in the markets since the launch of the euro on 1 January.

The yen dipped from as high as 118.88 to the dollar to 120.22. Against the euro it fell from a record high of 122.60 to 125.23.

The euro made gains against the pound and dollar too, climbing back above 65p and, briefly, $1.04.

Eisuke Sakakibara, the Japanese spokesman known as "Mr Yen" for his ability to move the markets, made it clear the BoJ would do whatever was necessary to cap the currency's rise. "A premature yen strengthening before an economic recovery is not desirable," he said.

Mark Cliffe, chief economist at ING Barings, said: "This is beneficial to both sides as it gives the euro a leg up, but the main thing is that it underlines the Japanese authorities' willingness to take the market on." Most currency experts agreed the intervention had been agreed jointly. "This is meant to send a clear signal that the Bank of Japan is opposed to renewed strength of the yen. The timing ahead of the summit makes it symbolic," said Nick Stamenkovic, an analyst at IDEA.

Yesterday's currency moves overshadowed further gains in share prices in London, where investors were relieved Alan Greenspan, the Fed chairman, had appeared to signal a limited increase in US interest rates. The FTSE 100 index ended 34 points higher at 6,527.8, although the Dow Jones index was 13 points lower at 10,829.96 late morning.

The Bank of Japan first stepped in on 10 June to sell yen, with sales of up to $1bn. It repeated the move on Monday, with sales rumoured to be worth about $5bn.

Yesterday the ECB acted on behalf of the BoJ, with traders estimating the intervention could have amounted to another $1bn. The Bank of Japan intervened to support the yen in mid-1998, concerned that it was then weakening too rapidly.

The leading industrial countries only rarely agree to co- operate on intervention in the currency markets, but can then turn around currency misalignments.

The last major swing occurred in April 1995 when the finance ministers decided to stabilise the US dollar, which was then falling rapidly towards 80.