Trader says don't bank on dollar falling to 95 yen in 2008

Kazuo Mizuno, chief economist in the Tokyo unit of Mitsubishi UFJ Securities Co., did just that when he told Bloomberg News Wednesday that the U.S. dollar could fall 20% to 95 yen in 2008, as a housing slump and a corporate spending pull-back forces the U.S. Federal Reserve to cut interest rates more.

Those lower interest rates would help stimulate the U.S. economy, but would also force the dollar lower, in Mizuno's interpretation.

That dire prediction for the dollar in 2008 had little effect on the dollar / yen major pairing Wednesday, with the dollar declining just 0.10 yen to 114.04 yen in mid-day trading. However, on the heels of disappointing October 2007 U.S. house price news, both the euro and the British pound rose against the dollar: the euro gained 0.70 cents to $1.4483 and the pound climb 0.40 cents to $1.9828 in light trading.

Mizuno's prediction represented the most negative dollar sentiment among economists surveyed by Bloomberg News, with the median calling for the dollar to fall to 110 yen in 2008, Bloomberg News reported.

Ignoring Bank of Japan?

Mizuno's 95 yen prediction also ignores a major factor in the pairing's value, according to one trader: possible market intervention by the Bank of Japan, Japan's central bank. Independent currency trader Andrew Resnick told BloggingStocks Wednesday that the Bank of Japan is not likely to let the yen appreciate to more than 105 yen to the dollar, let alone 95 yen to dollar, in Mizuno's interpretation.

"If history is any precedent, once the dollar starts to fall below 110 yen, the Bank of Japan starts to get concerned. When it falls below 108 yen, then the markets start to get edgy because they sense a Bank of Japan intervention is coming," Resnick said. "I don't see the dollar falling to 105 yen in 2008. I don't think the Bank of Japan would allow it." (Resnick added that he is flat presently, or has no currency positions, as he's on vacation this week.)

Exports deemed key

A rising yen versus the dollar forces companies who export to the United States, such as Japan's automakers, to choose from two unpleasant outcomes: either raise prices to offset the dollar's decreased purchasing power, or maintain prices and earn lower profits for the year. The former frequently has lead to decreased U.S. purchases of Japanese products - - such as the higher-priced Japanese cars - - which results in reduced profits.

Further, because exports in general, and autos in particular, are critical to the health of Japan's economy, the Bank of Japan intervenes - - it buys dollars - - to support the dollar, and by extension the market for Japanese exports when it believes the yen has risen too much against the dollar.

However, Resnick said it is possible that the Bank of Japan will let the dollar depreciate slightly more against the yen this time before intervening, for a variety of factors, but he doesn't see that tweak blotting-out its monetary policy.

"Historically, Japan has been much more mercantilist than the United States regarding monetary policy and I've seen nothing to convince me otherwise, to convince me that they've changed," Resnick said. He added that institutions will once again likely try to test the Bank of Japan, to see how low it will let the dollar go before intervening, but he expects these institutions to lose their appetite quickly, once the Bank of Japan sends a signal.

"Once they see the dollar rise like 2 or 3 yen in a matter of seconds, wiping out many dollar-short positions in seconds, they'll get the message," Resnick said. "Very few traders have the stomach for that."