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Japan threatens to diverse central bank holdings Original Source Link: (May no longer be active)
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Dollar Weakens After Koizumi Says Japan May Shift Its Reserves
March 10 (Bloomberg) -- The dollar fell to a nine-week low against the euro after Japanese Prime Minister Junichiro Koizumi said today his country ``in general'' needs to consider diversifying its foreign currency reserves, the world's largest.
Koizumi said in response to a question at parliament ``it's necessary to diversify the investment destinations'' of reserves while ``considering what's profitable and what's stable.'' The dollar pared losses after a finance ministry official said Japan has no plan to shift its $820.5 billion of reserves, comments later echoed by Finance Minister Sadakazu Tanigaki.
``The Koizumi comments are potentially very dangerous for the dollar,'' said Ian Gunner, head of foreign exchange at Mellon Financial Corp. in London. ``People have thought that Japan isn't going to diversify and it's going to stick with dollar reserves.''
Against the euro, the dollar dropped to $1.3438 at 8:40 a.m. in London, from $1.3392 late yesterday in New York, according to electronic currency-dealing system EBS. It fell as low as $1.3455, the weakest since Jan. 4 and about 1.5 percent from the record-low $1.3666 reached on Dec. 30. The yen traded at 104.02 per dollar, from 103.93.
The dollar pared its decline against the yen after Japan unexpectedly reported a drop in machinery orders, countering other figures this month that suggested the economy was pulling out of a recession. Orders fell 2.2 percent in January, against the median estimate in a Bloomberg survey of a 2.5 percent gain.
`Sell Yen Against Euro'
``Machinery orders were not good for the yen, while Koizumi's remarks are dollar-negative, so the best bet is to sell the yen against the euro,'' said Ashley Davies, a currency strategist in Singapore at UBS AG. The yen fell to 139.75 per euro, from 139.18. It may fall to 140 today, Davies said.
Japanese investors, including the central bank, held $712 billion of U.S. Treasuries as of December, making them the largest foreign holder. Most of the world's currency reserves, holdings of foreign currency at central banks, are in dollars.
``By saying Japan could diversify its holdings, it's opened a Pandora's Box,'' said Harvinder Kalirai, chief market analyst in Sydney at State Street Corp. ``It could impact the behavior of other central banks. This is going to weigh heavily on the dollar.''
The U.S. currency may fall to a record $1.40 against the euro this year, Kalirai said. State Street is the world's largest custodian of assets, managing more than $1.2 trillion.
Tanigaki's Remarks
Tanigaki told reporters at parliament that ``the prime minister's remarks didn't mean'' Japan plans to shift its currency reserves. ``We are taking a very cautious stance on how to manage foreign reserves, because the impact would be big.''
Japan's currency reserves increased after the Bank of Japan, at the direction of the finance ministry, sold record amounts of yen in the year to March 31, 2004, in an attempt to stem its advance against the dollar. Tanigaki said yesterday that Japan is ready to take ``appropriate action'' against ``excessive'' moves in foreign exchange rates.
``The Ministry of Finance speak with one voice and the prime minister with another,'' said Gunner at Mellon Financial. ``Coming up to the end of the fiscal year they are quite wary of dollar-yen sliding away,'' he said. The dollar fell to a five- year low of 101.69 yen on Jan. 17. The fiscal year ends March 31.
The dollar fell the most in six months against the euro and the most in four months versus the yen on Feb. 22 after South Korea's central bank announced plans to boost returns by diversifying its currency reserves. The bank later said it wouldn't sell dollars from its holdings to achieve its goal.
Treasury Yields Rise
``There's never been a comment from Japan that it might diversify, so the dollar getting sold off is understandable,'' said Robert Rennie, a currency strategist in Sydney at Westpac Banking Corp. Ministry clarifications ``helped shore it back up.''
Koizumi's comments, made in response to a question from an opposition member of parliament before the budget committee, pushed U.S. 10-year Treasury yields to the highest in more than seven months.
The yield on the benchmark 4 percent note due in February 2015 rose as high as 4.57 percent after Koizumi's remarks, the highest since July 30. The yield was at 4.53 percent at 7:49 a.m. in London, according to bond broker Cantor Fitzgerald LP.
Demand for U.S. Treasuries is strong and any rebalancing of foreign currency reserves would not have a significant effect on the Treasury market or economy, Randal Quarles, U.S. Treasury assistant secretary for international affairs, told reporters today at the Foreign Correspondents Club of Japan in Tokyo.
Central Bank Survey
The dollar slid as much as half a percent against the euro on Jan. 24, after a survey sponsored by Royal Bank of Scotland Plc showed central banks boosted euro holdings.
Almost 70 percent of the 56 central banks surveyed said they increased exposure to the 12-nation currency, according to the survey conducted by Central Banking Publications Ltd., a London- based publisher, between September and December 2004.
U.S. dollars accounted for 63.8 percent of the world's currency reserves at the end of 2003, down from 66.9 percent two years before, according to International Monetary Fund figures released in April last year.
Demand for the dollar may get support by expectations a government report today will show U.S. jobless claims held at the third-lowest since October 2000. Higher U.S. Treasury yields may also boost the attractiveness of U.S. assets.
``The dollar should find some strength against both the euro and the yen,'' said David Mozina, a currency strategist in Sydney at ABN Amro Holding NV. ``Yields are still going higher in the U.S., and that should spur buying interest.''
The number of Americans filing first-time claims for unemployment insurance was probably 310,000 last week, according to the median estimate in a Bloomberg survey of 34 economists.
Last Updated: March 10, 2005 03:45 EST
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