Dollar surges after Bank of Japan orders huge sale of yen

The dollar surged yesterday after the Bank of Japan ordered a massive sale of the yen in an attempt to weaken its currency and hand its faltering economy a lifeline.

In the first major foreign exchange intervention since the Group of Seven (G7) industrialised nations hammered out an agreement last weekend to let currencies find their own values in the market, the Bank of Japan significantly operated with the help of the New York market.

The financial markets responded rapidly after it emerged that the US Federal Reserve had carried out the BoJ's request to buy dollars and sell yen. Against the yen, the dollar rose more than half a per cent to 111.44, after falling to a three-year low of 110.12.

The dollar has slumped by ¥5 in the nine trading days around the G7 meetings in Dubai when John Snow, the US Treasury Secretary, was credited with scoring a crucial victory in persuading China to abandon its peg with the dollar.

Analysts said the fact the BoJ intervened together with the Fed sent a powerful message to currency traders. "It sends a signal to the market that Japan's intervention has passive US approval," said Steven Englander, the chief currency strategist for North America at Barclays Capital in New York.

Traders said Japan had drawn a "line in the sand" above 110 yen. The Bank of Japan confirmed it spent a record $38.7bn (£23.6bn) intervening in September.

Traders say Japan may have been forced to intervene because the dollar was being broadly punished following weaker than expected US economic data. This was reinforced by fresh data yesterday.