LONDON, Oct 8 - A growing conviction that policy makers are prepared to see the dollar fall sharply hit the U.S. currency again on Wednesday, battering Japanese stocks and underlining fears about Europe's fragile economy. Demand for European government bonds slipped despite a successful sale of German debt. European shares rose despite caution over the strong euro. Wall Street looked set to open flat to slightly higher later in the day. Market focus was focused squarely on the dollar, as it has been since the Group of Seven industrial nations called on September 20 for more flexible exchange rates. For a time, the U.S. currency was trading close to half a percent down on the euro and within a cent of its all time lows. It lost about a quarter percent against the yen. By the mid-European day, however, it had recovered slightly to $1.786 to the euro, down 0.16 percent on the day, and to 109.75 yen, down 0.16 percent. "Everyone hates the dollar," said Lee Ferridge, head of global currency strategy at Rabobank.
A need for the United States to correct its ballooning current account deficit and a desire by Washington to help shore up economic recovery by supporting its exports against mainly Asian competition has led to the dollar's weakness. But a wave of recent comments from Western policy makers suggesting they were unperturbed to see the dollar fall and were unlikely to intervene has fuelled the slide. U.S. President George W. Bush, for example, has called for a "level playing field" of currency policies. European finance ministers and European Central Bank President Wim Duisenberg have appeared calm about the euro's gathering strength. "Clearly, these people are saying they will tolerate a weaker dollar," said Shogo Nagaya, foreign exchange manager at Nomura Trust & Banking. But not everyone is relaxed about the currency moves. ECB Governing Council Member Ernst Welteke said on Tuesday that markets had misinterpreted the G7 and that the comment had been aimed at "Asian imbalances" rather than trying to weaken the dollar against the euro.
STOCKS, BONDS
Concerns that the stronger yen and weaker dollar will eat away at export companies' profits and unsettle Japan's nascent economic recovery helped sink Japanese shares. The Nikkei <.N225> ended down 2.57 percent at 10,542.20 on Wednesday and the broader TOPIX index <.TOPX> lost 1.88 percent to 1,054.75. "A drop in the dollar to 105 yen, for example, is something Japan's top auto makers can handle looking out one year or so," said Makoto Suzuki, fund manager at Chuo Mitsui Asset Management. "But earnings in the short term, say this business year or the first half of the next one, will undoubtedly take a hit." European shares managed gains, however, despite concerns that a strong euro could throttle the lagging euro zone economy. The FTSE Eurotop 300 <.FTEU3> index of pan-European blue chips was up 0.57 percent while the narrower DJ Euro STOXX 50 <.STOXX50E> rose 0.6 percent. On government debt markets, yields on euro zone bonds came close to one-month highs, despite the German sale. The two-year interest rate-sensitive Schatz yield was up 2.8 basis points at 2.538 percent. The 10-year bond yield was up 4.2 basis points at 4.237 percent. Euro zone bonds have recently been outperforming U.S. Treasuries in part because of the weaker dollar but also because the euro zone economy is lagging.//