The dollar fell sharply yesterday taking Wall Street with it as the Group of Seven statement over the weekend calling for more flexibility in exchange rates continued to cause confusion in world currency markets.
The call by the G7 was seen as a victory for the United States, which has been involved in a game of competitive devaluation with Japan and has criticised Tokyo for keeping the yen artificially weak in order to boost exports.
But no sooner had the dollar fallen against all major currencies than the US Treasury Secretary John Snow told reporters that there had been "no change in the strong-dollar policy".
Following the G7 statement the dollar fell to a near three-year low against the yen, whilst the pound and the euro also strengthened against the US currency.
The dollar fell by almost 2 per cent against the yen to ¥111.9 whilst sterling and the euro both ended nearly 1 per cent higher against the dollar at $1.648 and $1.148 respectively.
The sharp rise in the yen, seen as an indication that the Japanese authorities may stop intervening to hold down the value of the currency, prompted a 4 per cent fall on the Japanese stock market. The Nikkei index of leading shares ended 463 points lower at 10,475.
However, Wall Street also felt the backlash from a weaker dollar, with the Dow Jones index falling by around 100 points or 1 per cent in late afternoon trading. A fall in the dollar should be good news for US exporters but at the same time it makes dollar-denominated assets less attractive for foreign investors.
The fall on Wall Street had a knock-on effect in London as the FTSE100 index closed 28.2 points lower at 4228.2 points.
Dealers marked down shares in companies with heavy exposure to the US such as banks and pharmaceutical makers on the grounds that their dollar earnings would be worth less when translated back into sterling, holding back profits.
Japan has spent some $75bn since the start of the year, buying dollars in order to prevent the yen rising and snuffing out the country's nascent economic recovery. This has helped Japanese exporters against their American counterparts, particularly in China, which operates a fixed currency peg to the dollar.
The peg has resulted in the Chinese currency, the yuan, being undervalued by about 20 per cent. Dealers said it was very possible that the dollar would be tested further as the markets sought to establish a new ¥110 to ¥115 range against the US currency. But they also said it was likely that the Japanese Ministry of Finance and the Bank of Japan would step in again if they felt the yen was appreciating too rapidly.
Gold, which is denominated in dollars, rose to a seven-month high as the US currency cheapened. The commodity also benefited from its status as a "safe haven" investment in times of uncertainty.
In contrast to the dollar's woes, sterling continued to benefit from last week's minutes of the Monetary Policy Committee, which hinted that an interest rate rise was on the cards, notwithstanding the Bank of England Governor Mervyn King's attempt to damp down prospects of such a move.
Meanwhile, an indicator of future UK economic performance, the NTC indicator, increased for the sixth month in a row to its highest level since March, 2002. The indicator, compiled by NTC Research and designed as a guide to turning points in the business cycle, rose to 102.1 in August from 101.1 in July on the back of higher bond yields, increased car production and the recovery in the stock market.Reuse content