Japan to help prop up dollar

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The White House and Japanese authorities moved yesterday to slow a run on the dollar that was roiling the stock and bond markets.

With the greenback rushing to set a record low against the euro and broaching three-year lows against the Japanese currency, Japanese authorities issued a stern warning that the rapid decline of the dollar is a threat to their export-driven economy and they will not tolerate a rout of the American currency. A weaker dollar makes Japanese products, like cars and electronics, more expensive for consumers in the United States.

"The yen's recent gains have been too sharp. It's bad for the economy," chief Cabinet secretary Yasuo Fukuda told reporters in Tokyo yesterday. "We will respond to excessive moves. We will take decisive steps."

Bolstering the warning, Japan's government was rumored to be one of the largest buyers in the U.S. Treasury's auction yesterday of $16 billion of five-year notes to finance the burgeoning U.S. budget deficit. Fear that foreign buyers would boycott the auction was driving up U.S. interest rates and weighing on the dollar.

While private buyers did appear to stay away from the auction, foreign central banks, particularly the Bank of Japan, stepped in to take up the slack, Wall Street analysts said. Japan, with a portfolio of more than $450 billion in U.S. securities, is the largest foreign holder of U.S. bonds, which it has accumulated through years of efforts to prop up the dollar.

With financial markets on edge, White House Press Secretary Scott McClellan chimed in to support the greenback yesterday, telling reporters that the Bush administration has not abandoned its strong-dollar policy, despite concerted efforts by the U.S. Treasury and other Group of Seven finance ministries to engineer a gradual decline in the currency this past summer.

"Our policy has always been one of a strong dollar," he said.

Even as he spoke, the dollar was weakening to $1.181 per euro in New York trading from $1.176 Tuesday, within pennies of a new low. The dollar continued its fall against the yen, dropping to 109.57 yen from 109.93 Tuesday, its lowest levels since November 2000. The dollar also fell to the lowest level in nearly a decade against Canada's currency before rebounding slightly yesterday.

The jawboning by U.S. and Japanese leaders stalled the dollar's rapid decline, at least for now, traders said, and may have staved off a disaster for the U.S. Treasury. The faltering dollar and rising U.S. interest rates are making U.S. bonds less attractive to foreign investors even as the Treasury prepares to issue bonds at a furious rate to finance a record budget deficit of between $500 billion and $600 billion in the next year.

Mindful of the threat to U.S. financial markets, Federal Reserve officials joined in with talk to soothe nervous investors yesterday, stressing that inflation is not a threat despite a surge in U.S. economic growth this past summer and a falling currency that raises the price of imports and makes deficits more expensive to finance.

Their comments helped to stem a jump in bond rates that threatened to spoil the Treasury's bond auction. U.S. stocks also have been hurt in recent days by the threat of higher rates stoked by a falling dollar. And European stocks plummeted this week as the greenback's swift fall against the euro makes it harder for European companies to sell exports like German cars and French wines in the United States.

Despite the threat to European industries, European leaders have declined to take measures, like Japan, to support the dollar, contending that the fall of the greenback is the inevitable result of record U.S. trade deficits that bloated to more than $500 billion last year.