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Yen sweetens as euro sours

By Neville Bennett

Friday 29th August 2003

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There are tremendous changes taking place in global currencies. The most dramatic feature is the yen's five-month high against the euro and five-week high against the dollar.

As the dollar is somewhat stronger against the euro too, the essence of the situation is an appreciating yen and depreciating euro.

Why is the yen appreciating now? That is an important question for New Zealand exporters and importers.

The yen is appreciating because foreign investors are piling into Japanese stocks. Their demand for yen is stronger than the pressure coming from the Bank of Japan to drive their currency down.

Investors are interested in Japan because the funds industry has to keep producing good quarterly returns.

The pickings in Japan look good because the Nikkei has been making a strong run. This seems to be confirmed by a surge in the trade surplus by 7.3% in July.

The economy has been lacklustre for a long time but many observers appear to detect some signs of export-led growth.

Exports rose 5.6%, but imports grew 5.3%. Trade figures surprised for their strength. A growth in imports could suggest real movement in the domestic economy.

So while the yen and dollar are getting stronger, the euro is weakening ­ an excellent example of the sensitivity of currency markets to growth prospects. As the world's second-largest economy, stirrings of growth in Japan are exciting to investors, who wish to get in on the ground floor. Tokyo's bullish stock market keeps attracting funds.

Similarly, investors are deserting the euro, especially as Germany, Italy and France seem to have run out of steam. As predicted (NBR, Aug 15) the euro has lost much ground against the dollar. It reached a peak of $1.19c on May 27, has drifted to $1.08 and, according to Bear Stearns, seems set to go to $1.05. There is a huge amount of activity in the futures market on the euro/dollar rate and this seems to indicate much hedge fund activity.

The dollar is looking slightly stronger because longer term interest rates are firming up.

The housing boom is creating a vast market for finance: demand had lulled mortgage rates since their low in June. Record home sales in July will strengthen the trend.

The Australian dollar continues to appreciate and is set to maintain that trend for some time.

The future course of the Kiwi dollar is more problematic. It has appreciated enormously in the last year, driven by relatively high interest rates and strong economic growth.

It could roar higher if there is a repeat of 1996-97 when it responded to massive injections of eurobonds and samurai.

Since 2001, the kiwi has appreciated from about 45 to 55 to the euro. It has been strong this year.

The yen is a crucial currency in New Zealand's trade. Yet it is quite volatile. Since 1991, the exchange rate has fluctuated in a wide band of 44-84.

The kiwi was at its strongest in 1996-97 when interest rates peaked, and it plumbed its lowest point (42) as recently as spring 2000. Subsequently it has appreciated from 44 to 70.

When New Zealand-Japan trade is conducted in yen or kiwi dollars the volatility of rates can have a considerable effect on trade.

Many items are inelastic, so volumes are relatively stable. But many goods are price sensitive and it appears that much fresh produce may be losing profitability.

Yet problems for exporters means importers have greater opportunities and some Japanese goods that were too dear for our market may now start to appear. A mild appreciation of the kiwi is expected in the markets.

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