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October 8, 1998

Dollar Drops 8% Against Yen in One Day


The dollar plunged 8.1 percent against the Japanese yen on Wednesday, its biggest one-day decline in 25 years.

But this spectacular drop in the foreign-exchange market was not triggered by a new belief among investors that Japan was on the verge of turning its troubled economy around, traders and analysts said. If that were the case, the fall of the dollar could be seen as positive, as the end of the recession in Japan would help lead the rest of Asia out of its slump.

Instead, the traders and analysts said, the selloff seemed to be set off by a new rush of hedge funds and other investors to get out of bets against the Japanese currency that had been very profitable until two months ago.

Much of this selling reflects an unwillingness among hedge funds and other investors to take much risk -- or stick with relatively small losses for long -- in the current global financial crisis, even if they think the dollar will rebound from this plunge.

"In this risk-averse environment, people are just getting out," said Avinash Persaud, the global head of currency research at J.P. Morgan Securities in London. "All the people selling today believe the dollar should go up against the yen, but they can't tolerate the loss."

Most of the selloff happened during the trading day in Europe, rather than in Tokyo, where the yen got no boost even though the government neared approval of a plan to rescue the country's banking system and the stock market rallied.

Traders and analysts said much of the selling was reinforced by talk of major selling by two hedge funds -- Long-Term Capital Management LP, which had to be rescued last month with an infusion of $3.6 billion, and Tiger Management LLC, which is run by Julian Robertson, a well-known hedge-fund manager.

A spokesman for Long-Term Capital denied that it was selling dollars for yen. A spokesman for Tiger Management would not comment. But it is generally known that Robertson has made major bets that the yen would continue to weaken and that Japanese bank stocks would fall. And traders said they did see Tiger selling on Wednesday, as Japanese bank stocks rebounded and the yen rallied.

Traders also said there was a lot of selling after the dollar fell below 130 yen, 128 yen and 127 yen, levels where many derivatives based on a dollar-yen trade forced selling. The recent cut in interest rates by the Federal Reserve Board and the prospect of more is also weighing on the dollar.

In late trading in New York, the dollar cost 120.25 yen, down from 130.85 yen Tuesday, its steepest one-day fall since 1973, according to Bloomberg News. The dollar also fell against other currencies, but not nearly as much. Against the German mark, the dollar was down 1 percent to 1.6138 marks, from 1.63 marks Tuesday.

While the dollar is off 18.3 percent against the yen since Aug. 11 and 11.7 percent against the mark since July 9, it had held up well against other currencies, including the Mexican peso and the Canadian dollar, currencies of two of the United States' largest trading partners.

But the trade-weighted dollar, which reflects the dollar's value adjusted for the amount of trade with each country, dropped 2.3 percent Wednesday, according to the index kept by the Federal Reserve Bank of Dallas, and is down 5.4 percent since Aug. 28.

Analysts said that the aversion to taking even minimal risk in the current financial climate -- in which investors are bringing their money home and banks are less willing to make loans -- could be the catalyst that slows the world economy even more and even pushes the U.S. economy into a recession.

Even though Alan Greenspan, the chairman of the Federal Reserve, said Wednesday that there was not a credit crunch, analysts and economists are talking about it more every day.

"There is no good reason to change our mind that the risks for the global economy remain on the downside," John Lipsky, chief economist at Chase Manhattan Bank, said.

In less turbulent circumstances, the fall of the dollar could be positive for the U.S. economy and for other countries. A weaker dollar would make U.S. exports cheaper, helping reverse the sharp slide in this sector since the demand from Asia dried up with the economic crisis that erupted 15 months ago.

In addition, a weaker dollar could help make commodities more attractive by lowering their price to consumers in the rest of the world. Because most commodities are priced in dollars, a weaker dollar makes them less expensive in other currencies. Stronger commodity prices could help many of the world's troubled economies, like Russia's, that are major exporters of commodities.

But analysts are worried that the current slide of the dollar will have little benefit if the U.S. economy is slowing sharply and, in turn, makes things more difficult for other countries. In this circumstance, demand for U.S. exports and commodities would be likely to fall in a worldwide slowdown, even if a weaker dollar makes them cheaper.

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