The US dollar has fallen sharply on foreign exchange markets following signals in favour of "flexible" currency rates from the weekend meeting of finance ministers from the big industrialised countries. The decline disturbed investors and most major stockmarkets fell back.
Finance ministers from the so-called Group of Seven (G7) industrial nations said a flexible currency rate "is desirable for major countries or economic areas" in order to iron out global economic imbalances.
Markets viewed the statement as criticism of persistent intervention by Asian countries to keep their currencies weak for the benefit of their exports. In particular, it sparked speculation that Japan - which has spent heavily recently to intervene to keep the yen's value down - may stop trying to do this.
A statement later yesterday by Mr John Snow, the US treasury secretary, that "there's no change in the strong dollar policy" had little impact, with US dealers saying this policy now appeared to be abandoned.
Earlier the dollar had dropped to a three-year low against the Japanese yen, touching 111.41 yen, before trading close to 112 yen later. In European markets the euro was trading late yesterday at $1.1495, compared to $1.1350 at last Friday's close.
Dollar weakness unsettled European stock markets, with investors concerned about its impact on exporters to the US. The FTSE Eurotop index of leading European shares lost 1.8 per cent, while the Paris market was one of the worst hit as the CAC index dropped 3.15 per cent.
The Dublin market was one of the few not to lose ground, with the ISEQ index adding 0.3 per cent. Dealers attributed this to the defensive qualities of the leading Irish financial stocks, which supported the index yesterday, but any further weakness in the main international markets is likely to lead to falls here.
A sustained rise in the dollar's value would also add to competitive pressure on Irish exporters to the US. Having fallen back to the $1.08-$1.10 range in late August and early September, the US currency has now risen again.
While the weaker dollar should benefit US exporters, investors in the US markets were concerned that the falling currency would lessen the attractiveness of US financial assets. The US depends on a huge inflow of foreign capital to finance its current account balance of payments surplus. US stocks were weak across the board and the Dow Jones Index closed yesterday evening down 109.41 at 9,535.41.
Meanwhile, fears of a fall in purchases of US government bonds by Asian central banks hit bond prices and 10-year interest rates (bond yields) rose to 4.30 per cent from 4.16 per cent on Friday. The Asian central banks have typically intervened in the currency market by selling their own currency and buying bonds.
