Thursday, December 02, 2004

It was only a matter of time.
Japan and the eurozone authorities have discussed the prospect of joint currency market intervention if the yen and euro continue to strengthen against the dollar, a senior Japanese finance ministry official said on Wednesday.

Although he declined to comment on his European counterparts' response, he said a common eurozone view had emerged that the euro had reached levels that were harming Europe's economy. The European Central Bank refused to comment.

. . . Hiroshi Watanabe, vice-finance minister for international affairs, told Reuters on Wednesday: �Conditions are in place for Japan and Europe to be able to take harmonised action. It is natural for Japan and Europe to act when the dollar alone is falling.�

The ministry official said the dollar should not be weakening given the superior US growth performance. �If there is a general depreciation in the dollar, we should have harmonised action,� he said. �If the [dollar's] movement affects the European economy and the Japanese economy, we should defend ourselves.�
I suspect the background to this story is the ECB decided to finally face the unpleasant truth that the euro was bound to hit $1.40 sooner rather than later and, unwilling to take the full brunt of the dollar's rise, begrudgingly gave the BOJ a ring.

Recall that for the last two weeks the yen has been motionless while the euro (and the pound) has borne the full brunt of the dollar's fall. The Chinese are in the cat bird's seat; they are happy to devalue the renminbi, do only limited sterilization, and play chicken with the Japanese. Since Japan continues in deflation and does no sterilization, the Chinese know that Japan will always swerve before China will. Unfortunately for the Europeans, the terribly weak data coming out of Japan the last two weeks means all the pressure on the dollar is vented on them rather than on Japan.

I have this picture of Japan waiting patiently by the phone for the ECB to call, the ECB cursing the stars for throwing them into this position but finally making that call, and the Chinese riding the dollar down all the while with a smile.

UPDATE: It appears this "verbal intervention" by Japan and the Europeans has done some work. The euro was flirting with $1.34 this morning and is now comfortably under $1.33. The yen has even fallen to over 103 to the USD, its lowest level in over a week.


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