Last updated: February 12, 2013 3:38 am

US Treasury comment triggers fall in yen

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a woman counts japanese yen©Bloomberg

The yen plunged against the euro and the dollar on Monday after markets interpreted comments by international policy makers as a green light to sell the Japanese currency.

The dollar jumped to a high of Y94.42 after Lael Brainard, the top US Treasury official for international affairs, restated US support for monetary stimulus in Japan but warned against competitive devaluation.

The sudden movements highlight a volatile atmosphere in foreign exchange markets leading up to a summit of G20 finance ministers, which will be held at the end of the week amid fears of a new round of “currency wars”.

“We support the effort to reinvigorate growth and to end deflation in Japan,” said Ms Brainard.

On Tuesday the yen held steady in Tokyo morning trading, averaging Y94.27 to the dollar.

Stocks rose sharply after the previous day’s national holiday, however, as investors warmed to Ms Brainard’s show of support for Japan’s efforts to fight deflation and boost growth with aggressive monetary easing. All 33 sectors rose, with gains led by tyremakers and securities and banking firms.

Markets took her comments as a sign that the US will not publicly object to the new Japanese government’s aggressive push for easier monetary policy, during which some officials have made explicit references to the yen.

But Ms Brainard also said the G20 must not let countries manipulate their exchange rate. “The G20 needs to deliver on the commitment to move to market-determined exchange rates and refrain from competitive devaluation,” said Ms Brainard. In a remark that Tokyo may read as a warning she said countries should “continue to support this approach in words as well as deeds”.

“The G7 has long committed that exchange rates should float, except in rare circumstances where excess volatility or disorderly movements might warrant co-operation,” she said.

Ms Brainard’s comments follow remarks earlier in the day from the head of Germany’s influential Bundesbank, who warned eurozone politicians to stay away from talking down the euro, arguing that any policy to weaken the currency would lead to higher inflation.

The recent sharp appreciation of the single currency did not “signal a serious overvaluation”, Jens Weidmann argued in a speech that came at a time of rising fears the eurozone stands to lose most in a global currency war.

“If more and more countries attempt to depress their currencies, this could lead to competitive devaluations that will only know losers,” he said.

The euro has appreciated nearly 8 per cent since July on a trade-weighted basis. Businesses and politicians fear having a euro that is too strong will kill off hopes of a gradual export-led recovery for the eurozone.

France forced the concerns about the euro’s strength on to the agenda of a Brussels gathering of finance ministers.“We all prefer a strong euro to a dead euro,” said Pierre Moscovici, French finance minister on Monday. But he added that it was “not good news if we are unable to answer the aggressive attitudes” in international monetary policy that were creating volatility and weighing on growth in Europe.

“We must not enter a currency war,” he said, while at the same time demanding a “co-ordinated approach” that would look at all instruments available to a state.

The newly interventionist stance by the Japanese government of prime minister Shinzo Abe, overtly pressuring the Bank of Japan to loosen its monetary policy, has seen the yen weaken considerably against the dollar. That has prompted concern among policy makers of a new global dimension to a currency war that was first identified by Brazil’s finance minister in 2010 in the face of a weakening dollar/real rate.

In his defence of classical monetary policy in the German city of Freiburg, Mr Weidmann also attacked the idea of shifting away from inflation targeting. Mark Carney, the Bank of England’s incoming governor, has suggested this shift should be debated in the UK.

Although Mr Weidmann has just one vote on the 23-strong governing council at the European Central Bank, his voice as Bundesbank president carries great weight among other eurozone policy makers, especially from northern countries. The euro hit a session high against the dollar of $1.3428 after he spoke.

In the wake of a call by François Hollande, French president, to manage the value of the euro against other currencies, Mario Draghi, ECB president, last week made similar comments on the danger of politicians interfering with central bank policy.

But he had appeared to leave the door open to ECB action. This could take the form of an interest-rate cut, if the euro appreciated too far since this could lead to deflation.

Mr Weidmann said the currency discussion was a distraction by politicians from their “real challenges”. He quoted the ECB’s first president, Wim Duisenberg, speaking in 1999, when he said that finance ministers had agreed to exercise their right to orient exchange rate policy only in exceptional circumstances.

Last month, Mr Weidmann raised the spectre of a global currency war, suggesting the erosion of central bank independence around the world threatened to unleash a race to the bottom as politicians pushed central banks to replace inflation targets with measures that could serve to weaken currencies.

Speaking on Monday, he said he was also “sceptical” of alternative monetary policy targets to price stability, such as gross domestic product targeting, since any, even temporary, loosening of inflation expectations would “poison” central bank credibility.

“Moreover, changing the monetary policy framework during the crisis could harm trust in central banks and raise the suspicion that, de facto, there were other goals behind the change in strategy,” he said.

Mr Carney, who takes over at the BoE on July 1, has himself struck a more conservative note since first suggesting the bank dump its inflation target. Appearing before British members of parliament last week, he said there was a “high bar” to be met before any changes were made.

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