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Wednesday, June 17, 1998 Published at 15:33 GMT 16:33 UK

Business: The Economy

Yen and markets rally after US intervenes

The United States has for the first time sold dollars to strengthen the yen, and the Japanese currency has dramatically strengthened as a result.

The intervention is the latest sign of the Clinton government's nervousness about the Asian crisis.

[ image: Busy days: Tuesday $-¥146, Wednesday $-¥138]
Busy days: Tuesday $-¥146, Wednesday $-¥138
The administration confirmed the dollar sales in a terse one-sentence statement: "The New York Federal Reserve Bank is operating in the exchange markets on behalf of US monetary authorities."

After the intervention the dollar weakened sharply, dropping to ¥137.80. Earlier in the week the dollar had traded at an eight year high of ¥146.

Traders at major money centre banks in New York said the Fed began buying yen around ¥141.00 and continued to buy at ¥138.00.

The US Treasury Secretary, Robert Rubin, said the action had been taken in co-operation with Japanese authorities, and that the United States stood ready to do more. The joint action had taken the markets by surprise.

Japan's Prime Minister, Ryutaro Hashimoto, expressed "delight" over the American support for the yen, and pledged quick moves to rescue the Japanese economy to avoid harm to other nations. Mr Hashimoto said he and President Bill Clinton had consulted by telephone earlier on Wednesday, and that Japan realized a revival of its economy was "urgently needed."

Dealers said there were no immediate signs that European central banks were following suit.

The yen crisis

The yen's weakness had caused a slump on Asia's stock markets. The region's economies depend on Japanese buying power to drive their export industries.

Even before the intervention the yen had regained some strength, driven up by reports of crisis talks between the Japanese and US government. Traders had expected policies to stem the yen's slide, but not so soon.

The yen's new-found strength cheered up stock markets across the world.

[ image: What's the economic outlook]
What's the economic outlook
While Tokyo's Nikkei closed nearly unchanged, other Asian markets had enough time to rally on the back of the yen. Seoul gained a whopping 8.5%, Hong Kong rallied 6.3% to breach the 8,000 point barrier.

Across the region shares regained strength, and the trend continued in Europe and on Wall Street:

  • Frankfurt's Dax closed up 117 points at 5,709 - that is a plus of more than 2%.
  • The CAC-40 in Paris gained 1.5%.
  • The City of London shrugged of bad news on earnings figures to gain more than 1%.
  • And in New York the Dow Jones index rallied more than 200 points, driven both by the strong yen and buoyant tech stocks.

    Dark clouds over China

    The US intervention on the currency markets may have come just in time.

    Politicians, economists and investors all had worried that the yen's slide might force China to devalue its currency, the yuan.

    This could have triggered another round of competitive devaluations across Asia, with devastating effect on the world economy.

    On Wednesday a senior Chinese official acknowledged for the first time that his government was contemplating "to make adjustments". Until then the Chinese government had insisted that it would not devalue the yuan.

    The vice-foreign trade minister, Sun Zhenyu, said if the Japanese yen "continues to depreciate, this would put increasing pressure on China."

    Japan is China's largest export market.

    The US activity on the foreign exchanges may have averted a new currency crisis - but only for the moment. As long as demand in Japan remains sluggish and the economic fundamentals do not change, investors will be wary.

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