Dollar set for recovery despite sharp fall against yen

DIANE COYLE

Economics Correspondent

The dollar suffered a sharp setback yesterday in its recovery against the yen after it failed to breach the 100 barrier in the wake of the failure of a Japanese bank and credit union on Wednesday. But the feeble state of the Japanese economy was confirmed by new statistics, suggesting the dollar's reversal against the yen will be temporary.

Another cut in Japan's official discount rate is considered likely after the Ministry of Trade and Industry said yesterday its survey of manufacturers suggested industrial output will fall 1.9 per cent in the July-September quarter. This prospect will help keep the yen weak.

Output fell 2.4 per cent in July, its fourth successive monthly decline. MITI expects a 4 per cent rise in August but a 4.3 per cent fall in September. If this occurs, it will be the biggest drop in production in more than seven years.

Additional gloom was furnished by a fall of 11.2 per cent in housing starts in the year to July. This was the fifth successive month of decline.

Economists believe the Japanese authorities are now determined to hold the yen down and stimulate the moribund economy. "The recent weakness of the currency, along with the rebound in the stockmarket, has pulled Japan back from the brink of a recession that would have caused a financial meltdown," said Gerard Lyons, chief economist at DKB International. He said any sign of a sustained recovery in the yen would trigger a cut in the discount rate from its current record low of 1 per cent.

Statistics on the US economy painted a mixed picture yesterday. New orders for manufactured goods fell 1.3 per cent in July - far more than expected - with the weakness spread over a wide range of industries. The Chicago purchasing managers' index, one of the most important regional indicators, fell to 49.3 last month from 49.7 in July. A level below 50 is taken to point to a slowdown.

But there were fewer than anticipated new unemployment claims last week, with the total steady at 349,000, and personal incomes grew by a faster than expected 0.7 per cent in July.

Today's job figures for August will be decisive. "A strong report will definitely unwind expectations of further cuts by the Fed, and crystallise sentiment on the dollar," said Adrian Cunningham, an analyst at UBS.