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Dollar Rallies to Highest Level Against Yen in Nearly Five Months

January 4, 1995

NEW YORK (AP) _ The dollar rallied Wednesday to a 21-week high against the Japanese yen, drawing strength from a bond market sell-off in Tokyo and a U.S. government report favoring a stronger currency.

The yen’s broad weakening limited the dollar’s gains against key European currencies, however, as foreign investors dumped Japanese government bonds and then sold yen for German marks and other currencies, market participants said.

Elsewhere, the Mexican peso slid 4.7 percent against the dollar, reflecting continued weakness in the country’s financial markets and disenchantment among many investors with Mexico City’s plan to bolster its troubled economy. Late in Mexico City, the dollar fetched 5.5750 pesos vs. 5.3250 late Tuesday.

The dollar’s gains against the yen came mostly in Asia and Europe. Traders in Tokyo returned from New Year’s vacations to find the U.S. currency had risen sharply in American dealings Tuesday. The advance was reinforced by yen selling resulting from a move out of yen-denominated Japanese government bonds.

Koichi Takenaka, a vice president for the Industrial Bank of Japan in New York, said the Tokyo bond market sell-off may have come partly because foreign investors needed to raise cash to cover losses on slumping Mexican assets.

But in recent months, analysts have been expecting a downturn in foreign investment in Japan as U.S. securities become more attractive. American government bonds currently are providing higher returns than their Japanese equivalents at a time when U.S. inflation is relatively tame.

Takenaka and other participants said technical yen selling kicked in Wednesday as the dollar started to rise in Tokyo, extending its gains in London and New York.

``There is talk about a downturn in Tokyo financial markets,″ said David Durst, a vice president at Bear, Stearns & Co. ``But there is also nervousness on the part of many players who realize that the yen has been (strengthening) for so long that a reversal is inevitable.″

Amy Smith, currency strategist for the New York analytic service IDEA, said there was considerable activity in buying of dollar-yen options and rumors of a large contract for a 102-yen dollar rate due to mature on Friday.

In late New York trading, the dollar was quoted at 100.35 yen, the highest level since Aug. 10 and up from 100.68 late Tuesday. In London, the dollar rose to 101.35 yen from 100.45.

The dollar also changed hands in New York at 1.5593 marks, up from 1.5562. In London, the dollar advanced to 1.5605 marks from 1.5532.

Also supporting the U.S. currency, traders said, was a statement late Tuesday from the Treasury emphasizing the benefits of a higher dollar. The Treasury, in an annual report to Congress on exchange rate policy, reiterated the Clinton administration’s position in favor of a stronger dollar.

Providing a backdrop of support for the U.S. currency, market participants said, were expectations for an increase in short-term interest rates after the Jan. 31-Feb. 1 meeting of Federal Reserve policymakers. The central bank’s Federal Open Market Committee is expected to raise its target rate for the key federal funds rate one-half percentage point to 6 percent in its effort to pre-empt inflation.

Other late dollar rates in New York, compared with late Tuesday: 1.3100 Swiss francs, down from 1.3140; 5.3695 French francs, up from 5.3670; 1,625 Italian lire, up from 1,623; and 1.4023 Canadian dollars, down from 1.4060.

The British pound was quoted at $1.5610, down from $1.5635. In London, the pound dropped to $1.5600 from $1.5640.

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