In its first intervention exercise since the launch of the new single currency in January, the European Central Bank (ECB) yesterday sold more than $2 billion (€1.92 billion) in yen for euros, in a bid to curb the strength of the Japanese currency.
The move - on behalf of the Bank of Japan - gave dealers vital clues about how the fledgling central bank will operate on markets if it chooses to support the euro.
The euro leapt more than three yen from a life low of 122.60 yen, while the dollar leapt nearly two yen from session lows of 119 yen in the wake of the intervention.
The ECB confirmed the action which, according to dealers, involved using national central banks as well as its own in-house Frankfurt dealers as conduits for its intervention. The Bundesbank, the Bank of France and the Bank of Italy were all cited as being involved, but a spokesman for the Irish Central Bank declined to say if it had participated.
Dealers said the intervention was rumoured to have totalled between $2 billion and $3 billion and was conducted with the help of up to 20 banks.
"This was a very noisy operation with bells and whistles attached, and was, by and large, a pretty professional exercise," said one dealer, whose bank was one of the first to deal directly with the ECB itself.
"The main clarification was the ECB is quite happy to round up the full weight of individual euro zone national banks whenever it feels it necessary," he said. "This has a powerful ratcheting effect when different centres are reporting different intervention levels."
The Japanese central bank sought the ECB's intervention as leaders from the Group of Eight nations - the Group of Seven industrial nations, plus Russia - met in Cologne. The move is seen as a strong signal of Japan's determination to prevent yen strength damaging the country's nascent economic recovery.
President Clinton told Japanese Prime Minister, Mr Keizo Obuchi, yesterday to use all tools at his disposal to spur Japanese growth, a top White House official said.
"The Japanese authorities are quite clearly concerned about this so-called premature appreciation of the yen," said Mr Jeremy Hawkins, chief economic adviser at Bank of America in London.
"It is not just the case of yen gains against the dollar but concerns about it making too much ground against Europe and losing key export markets there."
Bank of Japan intervention on the euro/yen could also have been prompted by a desire to limit the losses Japanese investors suffer because of their exposure to euro-denominated assets, analysts said.
Japanese investors had stocked up on such assets when the single currency was launched in January and have been hit hard by the euro's 7 per cent decline against the yen.
