No Intervention Is Expected as Yen Gains on Dollar

The U.S. dollar continues its downward slide against major currencies including the yen. The dollar hovered near an eight-year low against the yen Tuesday, as fresh signs of deterioration in credit markets hurt global shares and sparked unwinding of carry trades.

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Speculation that the Federal Reserve might lower interest rates from the current 3 percent before its regularly scheduled meeting on March 18 has also spurred dollar selling. U.S. interest rate futures now fully price in a 75 basis point rate cut from the Fed this month and around a 15 percent implied chance for rates to be lowered by 100 basis points.

The dollar's slide to an eight-year low against the yen has fueled speculation about the potential for yen-selling intervention by Japanese authorities.

Japanese authorities have a long history of fighting currency strength to prevent competitiveness of Japanese exporters from weakening. The last time they sold yen to stem the currency's rise was on March 16, 2004, when the dollar was trading at about 108.60 yen.

But this time, many market participants do not expect Japan to intervene even if the dollar falls below the psychologically important 100 level for the first time in more than 12 years.

On the four occasions dollar-yen has traded down towards the 100 yen level since 1995, we have seen Japan stepping into the market through the Ministry of Finance, selling yen and buying dollars.

Benjamin Pedley, investment strategist at LGT Bank in Liechtenstein told CNBC's Asia Squawk Box that he doesn't think Japanese intervention will happen this time. "We have a year-end target for dollar-yen at around about 96. The reason I don't think that the Japanese authorities will step in is that it will put them in disagreement with U.S. authorities," Pedley said.

Pedley thinks that the U.S. is very comfortable with the weaker greenback, which gives some of their exporters an edge as the country enters a recession. "I also think it's worth pointing out that (in) 2008 for the first time since 1991, we may well see Japanese economic growth outpacing economic growth in the U.S.. So there is actually an economic reason why as to why the yen should be rising in the current environment," Pedley adds.

Any kind of intervention would not be effective unless it is a coordinated action. But such a coordinated intervention is unlikely at a time when other members of the Group of Seven nations have been calling on China to allow greater exchange rate flexibility.

Japanese Finance Minister Fukushiro Nukaga on Tuesday stuck to the ministry's usual line that the government was watching currency movements carefully and said he had no comment on
specific currency levels.