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Fears of a slowing U.S. economy are driving investors to ditch the dollar for the yen and the Swiss franc – and that’s causing problems for the Japanese and the Swiss.
Fears of a slowing U.S. economy are driving investors to dump the dollar for the yen and the Swiss franc – and that’s causing problems for the Japanese and the Swiss. The stronger the two countries’ currencies are, the less competitive their exports become in terms of price.
The dollar has dropped 11 percent versus the yen and 25 percent versus the franc in the 12 months leading up to July 31 of this year, Bloomberg reports.
On Thursday, the Bank of Japan intervened for the third time since September, selling one trillion yen ($12.5 billion) to weaken it.
The reason for the move was clear. "That strong of a yen is simply unsustainable for the Japanese economy since it is so export driven," Boris Schlossberg, director of currency research at GFT Forex, told CNNMoney. Japanese exporters like automaker Mazda, which recently posted a 25.5 billion yen loss in the second quarter, are making lower profits, he noted. "The Japanese economy is still trying to recover from the earthquake earlier this year, so it's very important to stimulate as much growth as possible," Schlossberg added.
Following the action, the U.S. dollar did rise 4 percent higher against the yen, but dropped again and ended the day up just 2.5 percent, Reuters reports.
Japan’s intervention came just one day after the Swiss National Bank cut interest rates to "as close to zero as possible," and announced it would increase the supply of Swiss francs to money markets this week. The bank said its "massively overvalued” currency was "threatening the development of the economy and increasing the downside risks to price stability in Switzerland,” CNNMoney reports.
Observers doubt government intervention can stop jittery investors from scurrying to what they perceive as safe havens as the U.S. economy continues to sputter.
Bloomberg explained the attraction:
The franc and the yen are regarded as havens as Switzerland and Japan run current-account surpluses, the broadest measure of trade, meaning they don’t need to rely on foreign capital to balance the books. The U.S. runs a current-account deficit.
“Officials in Japan and Switzerland won’t be able to cap gains in their currencies with the U.S. dollar declining amid a weak economy and the risk of further monetary easing,” Richard Grace, Sydney-based chief currency strategist and head of international economics at Commonwealth Bank of Australia, told Bloomberg. “U.S. yields are unattractively low, real rates are negative, the current account deficit is wide and the sovereign rating is at risk. The U.S. dollar is declining for good reason.”