Dollar Reaches 8-Month High After Japan Cuts Interest Rate
The dollar, which had sunk to historic lows, climbed to its highest level since January after Japan slashed a key interest rate and Treasury Secretary Robert Rubin hinted at more coordinated efforts to boost the U.S. currency.
While the action may give the Federal Reserve room to cut U.S. interest rates further, American manufacturers worried that a stronger dollar might make the yawning U.S. trade deficit even worse.
The Bank of Japan announced in Tokyo Friday that it was halving its 1 percent discount rate to the lowest level ever for any industrial country.
“This was a significant admission by the Bank of Japan that the Japanese economy remains in difficult straits with a beleaguered banking system in need of massive rate relief,” said Allen Sinai, chief global economist at Lehman Brothers in New York.
The action, which was taken in an effort to lift the country out of its four-year economic slump, was immediately welcomed by the Clinton administration.
Rubin said in a brief statement that the credit easing should “help contribute to conditions that will promote a recovery in (Japanese) domestic demand, greater financial stability and a continuation of recent developments in exchange markets.”
The Japanese stock market soared on the announcement and the dollar briefly climbed above the 100-yen level for the first time since January. In later European and U.S. trading, the dollar retreated somewhat as currency traders took profits.
But it closed at 99.70 yen, 25 percent higher than its all-time low of 79.85 yen on April 19. The dollar’s strength and the prospects of a Fed rate cut helped to propel the stock market, sending the Dow industrial average up 31 points to 4,700.72.
Rubin said the Japanese rate cut was in line with a strategy announced by the United States and the world’s six other wealthiest industrial countries on April 25 aimed at an “orderly reversal” of the dollar’s declines in foreign exchange markets.
In his statement, Rubin said, “We remain prepared to cooperate closely in exchange markets.” But while Japan did intervene massively, by some estimates buying as much as $5 billion worth of dollars, the United States stayed on the sidelines.
Private economists speculated the United States was waiting until a day when its intervention would have more of a surprise impact on markets, reflecting the pattern established the last three times the United States has intervened, on May 31 and twice in August.
The administration effort to push the dollar higher has sparked a debate among economists. Many have praised the strategy as a way to relieve inflationary pressures in this country by reducing the cost of imported goods. That, in turn, would give the Federal Reserve room to cut interest rates further to make sure the U.S. economy emerges from its spring slowdown.
But some analysts said with the United States headed for a record trade deficit this year the dollar needs to remain low to make American products more competitive overseas.