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Dollar plunges on surprise Japanese intervention, tax cut proposal

December 17, 1997

NEW YORK (AP) _ The dollar suffered its sharpest drop in nearly seven years Wednesday after Japan’s central bank launched a rare sale of dollars for yen and the government proposed a $15 billion tax cut aimed at reviving Japan’s sagging economy.

The surprising events from Tokyo also hurt the dollar vs. the German mark.

The U.S. currency dropped nearly 6 yen from an intraday high of 131.53 after the Bank of Japan intervened in the market to support the yen for the first time since August 1992 and in reaction to Prime Minister Ryutaro Hashimoto’s huge proposed income tax break.

The dollar recouped some of its losses later in the session, but its intraday plunge was the biggest since January 1991, according to Foreign Exchange Analytics of Essex, Conn.

``The Japanese are finally doing what the West has been asking them to do for some time, and that is to stimulate their economy through domestic measures,″ said Pierce Atcheson, chief dealer for NationsBank in Chicago.

Hashimoto’s plan for a $15.38 billion income tax cut, aimed at boosting consumer spending, is part of a package of measures to spur an economic recovery and bolster Japan’s ailing financial sector. His party had unveiled plans Tuesday for $6.59 billion in tax cuts, centering on corporate tax relief.

In late New York trading, the dollar settled at 127.08 yen, down from 130.78 late Tuesday, its lowest level in about three weeks. The dollar also was changing hands at 1.7735 marks, down from 1.7822.

Despite the drop, the dollar is still up 11 percent against the yen since July 1, when it traded at 114.88 before a devaluation of Thailand’s baht currency set off an Asia-wide currency crisis.

Traders said Tokyo’s actions Wednesday should keep the dollar from gaining too quickly against the yen through the rest of this year.

``From the market reaction, there isn’t that doom and gloom on the yen and the Japanese economy,″ said Agostino Floro, an assistant vice president of foreign exchange at Bank Austria. ``People are saying it feels and it looks like the government is making an effort to turn this around.″

South Korea’s decision Tuesday to allow its won currency to trade freely against the dollar also has helped raise optimism about a turnaround in Asia’s battered financial markets.

``People are starting to behave as through the worst might be over,″ Floro said.

The dollar’s weakness against the yen helped pull it down vs. the mark. The German currency also was aided by comments from the country’s central bank that indicated the bank desires a stronger mark.

The Bundesbank’s December monthly report said the mark has only partially rebounded from its depreciation this summer, suggesting the bank could consider raising interest rates to boost demand for the German currency.

The dollar also fell sharply against the British pound, due to the dollar-yen plunge and stronger than expected British retail sales data. Sterling was quoted at $1.6521, up from $1.6353.

Other late dollar rates in New York, compared with late Tuesday: 1.4360 Swiss francs, down from 1.4403; 5.9380 French francs, down from 5.9645; 1,741.25 Italian lire, down from 1,746.50; and 1.4222 Canadian dollars, down from 1.4224.

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