The Group of Seven industrialized countries moved Thursday night to prop up the U.S. dollar, which had fallen to record lows against the Japanese yen this week in the wake of Japan’s devastating earthquake.
The huge drop in the dollar was attributed to speculation that Japanese insurance companies and investors are pulling their money out of U.S. Treasury bonds to finance relief efforts and reconstruction of areas hit by one of the worst earthquakes and tsunamis in history a week ago.
The dollar’s decline puts additional pressure on Japan’s already hard-hit economy by making its exports of cars, cameras and other key goods more expensive for U.S. consumers. It also hurts the U.S. by making investment in U.S. Treasury securities less attractive to the Japanese, who have played a key role in financing U.S. deficits for decades.
In a statement released on Thursday night with other G-7 finance ministries, the Treasury Department said that it will intervene in foreign exchange markets on Friday to prevent any further fall in the dollar against the yen. The dollar had dropped to record lows of less than 80 yen in trading on Wednesday.
The Treasury said the move was made at the request of the Japanese authorities and was joined by central banks in the United Kingdom, Canada and the European Union as well as the U.S.
Such coordinated actions by the world’s most powerful central banks are relatively rare and not always successful.
Masafumi Yamamoto, analyst with Barclays Capital, said Thursday night’s announcement sent a “strong message” that the G-7 supports Japan, and added that he thinks the measures are likely to work as intended.
“As yen appreciation since the earthquake has been largely attributable to market speculation over the repatriation of funds by Japanese insurance companies and retail investors, and not necessarily to the actual repatriation flows, the joint G-7 intervention is likely to have a meaningful impact in discouraging speculative purchases,” he said.