TOKYO, Sept 22 - The yen soared to its highest level in nearly three years against the dollar on Monday on speculation Japan will stop trying to hold down the yen after the Group of Seven called for flexible currency regimes. The yen rose as high as 111.37 to the dollar in early morning trade, its highest since December 2000 and up more than two percent from late Friday's level around 114.01 yen. Analysts said uncertainty about who would replace Masajuro Shiokawa as Japan's finance minister also gave the yen a boost. "A cabinet reshuffle will take place today and the market is uncertain about what stance the new finance minister will take on foreign exchange policy, and this is pushing up the yen," said Yasunari Ueno, chief market economist at Mizuho Securities.
Prime Minister Junichiro Koizumi is expected to announce the line-up of his new cabinet sometime this afternoon. By 0212 GMT, the dollar had dropped back to 112.18/23 yen amid caution that the Japan authorities might intervene. Japanese Vice Finance Minister Masakazu Hayashi said on Monday that the government would act if it saw volatility in the foreign exchange market, warning against the yen's recent surge against the dollar. Tomoko Fujii, economic and market analyst at Nikko Citigroup, said Japan's stance on forex intervention depends on whether the the yen's appreciation is justified by the current economic rebound. "But whether this morning's 111 yen level is a level Japanese authorities can tolerate, the answer is 'No'," Fujii said.
G7 AFTERMATH
The G7 did not mention specific currencies in its statement, but analysts interpreted it as targeting China and Japan, prompting speculation that Japan will find it difficult to conduct aggressive currency intervention. Japan has been intervening to stop the yen from strengthening to support its export recovery. "While the G7 meeting in Dubai over the weekend may not have contained the explicit language of the Plaza Accord, the desire to weaken the USD and spread the burden of USD weakness from Europe into Asia could not have been clearer," said National Australia Bank strategist Greg McKenna.
"The wording of the communique seems stronger language than we anticipated. It could be viewed as a victory for the U.S. side of the argument and for (U.S. Treasury Secretary) John Snow," McKenna said. Rather than its usual promise to "monitor exchange markets closely and co-operate as appropriate," the G7 reaffirmed that exchange rates should reflect economic fundamentals. "In this context, we emphasise that more flexibility in exchange rates is desirable for major countries or economic areas to promote smooth and widespread adjustments in the international financial system, based on market mechanisms," it said. With the dollar clearly breaking below closely watched levels, dealers said it was hard to see how much more the greenback would fall against the yen. "It is extremely difficult to peg where the next target is, having seen the dollar fall from 115 yen," said Yuichi Ishibashi, forex director at Barclays Bank. "But you can say that the market has not reached a selling climax yet. The only target I can say for now is a round figure like 110 yen," he added.
The euro also slipped against the yen to 127.95 yen compared with 129.85 yen late on Friday in Tokyo and a New York pre-weekend close of 128.77 yen. The dollar extended its fall against the euro , widening to a two-month low of $1.1498 versus $1.1391 on Friday, while the Swiss franc was 1.3569 francs against 1.3678 in New York.//