Friday, March 11, 2005

I've become a bit of a currency crash nay-sayer over the last few months and am moved less and less by rumors sweeping the currency markets that the East Asians have had their fill of the dollar and are pushing away from the table. As Brad Setser has told us many times, simply buying less consttitutes a pull-back, so the latest news out of Japan is getting everyone's knickers in a bunch.
The dollar fell and Treasury yields rose yesterday after the Japanese prime minister made remarks that suggested the country's central bank could be shifting some of its huge reserves out of dollars and Treasury securities.

Japan's Ministry of Finance quickly denied there was any change, a statement that limited the fall of the dollar and bolstered Treasury prices. But the volatile reactions in the markets underscore that the dollar, already under pressure from the drag of the United States' record current-account deficit, has another issue that could weigh on it in the future.
It is surely true that Japan is interested in diversifying its position, and with the yen stuck around �103-105 to the dollar of late, a little strengthening of the Japanese currency can be easily afforded now. Note that simply because of US inflation (2.4%) and Japanese deflation (-0.3%) between 2003:IV and 2004:IV, the magic �100 line is now up to �97 and surely higher still for 2005:I. So until the yen rises to around that level, I'm not going to lose too much sleep over the currency musings of Japanese politicians.

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