The dollar slid to new three-week lows against the yen on Wednesday as traders wondered if Japan would scale-back its massive intervention and as the prospect of interest rate hikes in the U.S. faded. Speculation was building that Japan may be rethinking its policy of dollar-buying intervention amid worries about losses on the world's largest forex reserves, much of which are ploughed into the U.S. Treasury market. Traders said the fall was accelerated by remarks from former top finance official Eisuke Sakakibara, who told that it was necessary for Japan to exit its policy of massive intervention at some point. "There's been a huge change in market sentiment in the last week about Japan's intervention policy," said Jake Moore, foreign exchange strategist at Barclay's Bank. Traders said that investors had reacted to comments by Sakakibara that the United States would not tolerate yen-selling to push the yen below 115 yen.
The dollar fell to around 108.25 yen for the first time in three weeks and Tokyo traders said it could soon test waters below 108 yen. It was around 108.80 yen in late New York trade on Tuesday. The yen also edged up against other currencies, touching a one-month high around 132.55 per euro . Traders said the euro was sluggish amid concerns about Europe's economy and heightened security worries after a major French newspaper published a letter from a fringe Islamic group threatening to "plunge France into terror and remorse". Investors were awaiting euro zone consumer prices data due at 1000 GMT, a day after Germany's ZEW institute said its gauge of economic expectations fell in March for the third straight month to its lowest level since last summer. Weaker-than-expected prices data could rekindle market expectations about a rate cut by the European Central Bank. By 0627 GMT, the euro was trading around $1.2270 , hardly changed from its late New York level.
INTERVENTION INTRIGUE
Sakakibara's comments came after Haruhiko Kuroda, a special adviser to Prime Minister Junichiro Koizumi, said on Tuesday that intervention was a short-term policy tool that cannot truly manipulate the world's three major currencies because of vast global capital flows. Japan's top currency diplomat Zembei Mizoguchi reiterated on Wednesday that Japan would continue to intervene in foreign exchange markets to dampen volatility. But traders said that even though Japan's massive intervention looked unsustainable in the longer run, few were ready to aggressively sell the dollar yet. "Even if there were to be a change in Japan's intervention policy it would likely be continued until the end of March," said Mitsuru Sahara, vice president of the forex dealing group at UFJ Bank. Japanese corporations close their books for the 2003/04 fiscal year on March 31, and Japan is seen keen to avoid any spike in the yen until then. Such a jump would bite into the overseas earnings of the country's export giants. Also weighing on the U.S. currency was the prospect that the U.S. Federal Reserve was in no hurry to raise interest rates anytime soon. In a statement following its meeting on Tuesday, the Federal Open Market Committee (FOMC) expressed more caution on the economy, noting continued weakness in job creation, which dulled the prospects of higher rates any time soon. Higher rates would make dollar-based assets more attractive to foreign investors. The benchmark official U.S. lending rate stands at 1 percent, the lowest since 1958, compared with 4.0 percent in Britain. Fed Chairman Alan Greenspan is due to speak via satellite on banking to the Independent Community Bankers of America Convention in San Diego at 1630 GMT.///