Tokyo budget package sends dollar crashing

The dollar fell below the psychologically important Y100 level against the Japanese currency yesterday in a dramatic reversal of recent gains.

It has declined by more than four yen in the past two days. Investors took the announcement of Japan's budget package on Wednesday as a signal to cash in on the dollar's 17 per cent rise since early August.

Paul Chertkow, head of currency research at investment bank UBS, said: "The market has been given an excuse to take profits on the dollar."

The currency upset spilt into the stock market. Share and bond prices fell, with a stronger-than-expected rise in US jobless claims last week adding to the damage.

Turmoil on the European foreign exchanges added to the dollar's woes. The mark and Swiss franc surged after remarks by Theo Waigel, Germany's Finance Minister, casting doubt on Italy's chances of meeting the criteria for European Monetary Union.

A half-point cut in its discount rate by the Swiss National Bank yesterday morning brought only a brief pause in the rise of the Swiss franc and mark and the fall of the dollar. Intervention by the Bank of Japan to buy dollars - said by dealers to be small-scale - was equally ineffective. Currency analysts said the dollar could fall further. Adrian Schmidt, international economist at Chase Manhattan, said: "Despite this shake- out there could be further dollar sales."

He said the decline was triggering "stop-loss" sales, when investors cut their losses by selling out when the exchange rate reaches a pre-set level.

Many analysts think the US administration is not unhappy to see the dollar's climb come to a halt before it becomes strong enough to damage US exports. Their view was lent support by Fred Bergsten, an academic economist believed to have the ear of administration officials. He said the exchange rate needed to fall back to Y90 to help boost trade.

However, another camp of analysts reckons this set-back to the dollar will be short-lived. They argue that central banks would jointly intervene to support the dollar if it fell too far, as they did in mid-August.

Keith Edmonds, of IBJ, said: "The authorities have already proved their mettle. They want to see the yen weaker but will pick the right time to step in."

The 15 August intervention took place after the yen-dollar exchange rate had already begun to turn, when many investors needed to cover their "short" positions.

The dollar was at Y99.27 shortly after midday in New York from its previous close of Y102.65, and at DM1.4324, from DM1.4613. The Dow Jones index was 19 points lower at 4,773 at noon.