Last updated: September 18, 2006 5:33 pm

Yen hits five-month low after G7 meeting

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The yen slumped to its lowest levels against the US dollar since April on Monday, shrugging off an apparently concerted attempt by central bankers to talk up the ailing Japanese currency.

Jean-Claude Trichet, the president of the European Central Bank, said in the aftermath of the weekend’s G7 meeting in Singapore “We noted that [Japan] had exited its zero rate policy, that its recovery is now broad based. We agreed that the yen will reflect these developments.”

Sadakazu Tanigaki, the Japanese finance minister, agreed that the value of the yen should reflect Japan’s recovering economy, adding that the recent fall in the currency, which has tumbled 6.1 per cent against the euro since mid-May, hitting 16 separate all-time lows along the way, had been a “little rough”.

However, after an initial spike higher, the yen reversed direction. By mid-session New York trade, the currency was down 0.3 per cent at Y117.96 to the US dollar, hitting a five-month low of Y118.28 in the process, 0.4 per cent at Y149.46 to the euro, 0.5 per cent at Y88.92 to the Australian dollar and 0.2 per cent at Y221.43 against sterling.

The fall suggested the market was putting more weight on the actual communique released after the G7 meeting, which did not mention the yen.

Indeed, although the G7 once again said “greater exchange rate flexibility” was desirable from “emerging economies with large current account surpluses, especially China”, the annexe to the April meeting which explicitly called for Asian currency appreciation did not make a reappearance.

The pressure on Beijing to allow the renminbi to appreciate, a move that many believe would strengthen Asian currencies in general, appeared to weaken still further on Monday when Hank Paulson, the US Treasury secretary, said he was not seeking any “quick fixes” on the renminbi, which fell a fraction to Rmb7.9475 to the dollar on Monday.

Analysts were unsurprised that the attempt to talk the yen up had failed. “This attempt at verbal intervention has had no impact and understandably so,” said Derek Halpenny, senior currency economist at Bank of Tokyo-Mitsubishi UFJ.

“Zero interest rates have indeed ended in Japan but to suggest that an official rate of just 0.25 per cent would be the catalyst for changing the fortunes of the yen lacked credibility.”

Stephen Jen, currency economist at Morgan Stanley, who saw scope for the yen to fall to Y120 against the dollar and Y150-155 versus the euro, added: “What Europeans think about the yen will not affect its performance. Only when the country of the currency in question wants the currency to move should we take the official comments seriously.”

As if to emphasise Mr Jen’s point, the euro firmed a fraction to $1.2672 against the dollar and £0.6748 against sterling after Klaus Liebscher, a member of the ECB’s governing council, said he saw a “rising danger of rising inflation,” adding to a series of broadly hawkish comments from eurozone central bankers.

Dollar softness was exacerbated by the release of weak US data. The second-quarter current account deficit widened more than expected to $218.4bn, while net cross-border portfolio inflows collapsed to $32.9bn in July, barely half of the monthly trade deficit.

Michael Woolfolk, senior currency strategist at Bank of New York, said his bank’s in-house data suggested foreign buying of US Treasuries had recovered since July, but he suggested that US investors were increasingly being advised to hold a portion of their assets overseas in order to benefit from any structural dollar decline.

The Hungarian forint firmed 0.4 per cent to Ft270.80 to the euro despite the leaking of a tape recording in which Ferenc Gyurcsany, the prime minister, admitted lying to win April’s general election. Goldman Sachs was among those tipping Mr Gyurcsany to survive the scandal.

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