Currencies
The terrible U.S. employment report initially added downward pressure on the value of the dollar on Friday. And while initially putting more pressure on the dollar, the resignations of Treasury Secretary Paul O'Neill and economic adviser Larry Lindsey eventually trimmed the dollar's losses. Investors saw their departure as perhaps paving the way for tax cuts and spending increases to bolster the economy. On the week, the U.S. dollar suffered its first weekly decline in four, and extended its decline against the euro to over 13 percent this year. Although the dollar gained against the yen on the week, it is about 6 percent below the end of 2001.

Four of Japan's top economic ministers stepped up calls for the yen to reflect the weakness of the nation's economy. The remarks were part of an effort to lift Japan's exports and boost its economy, which might be headed for its fourth recession in a decade. In yet another attempt to talk the yen down, Japanese Finance Minister Masajuro Shiokawa said that an exchange rate of 150 yen to 160 yen to the dollar would reflect the state of Japan's economy. Shiokawa later said that an exchange rate of between 120 yen and 125 yen to the dollar shows that Japan's strong production ability is recognized by the world. The yen has mostly held within that range since mid-September. The yen obliged and sank, but the U.S. employment report sent the yen soaring at warp speed. It fell again as market players decided that the resignations were a good thing.

A weakening yen helps Japanese exporters by increasing their earnings when converted into local currency and makes it easier for them to cut prices overseas without reducing revenue. Weakening the yen is one of the few policy options left to officials to boost the economy. The Bank of Japan cut interest rates almost to zero in March last year, and the government approved 3 trillion yen in extra spending for this fiscal year ending March 31, adding to Japan's national debt, which at close to 140 percent of gross domestic product is the industrialized world's largest.

Recent months have seen a shift in focus for currency markets from actual and potential economic growth rates (and before that merger and acquisition related equity flows), to one of yield and fixed income portfolio flows. Demand for liquid and short-term investments has been heightened by geopolitical worries, caution over equity markets, and uncertainty about the speed of the global economic recovery particularly with regard to the United States. While U.S. economic data have shown a distinct improvement over the last few weeks and in turn helped boost equity markets and the dollar, price action shows it only takes one or two slightly disappointing releases to sour sentiment - witness the market's reaction in the week to the U.S. purchasing managers' manufacturing report and the employment data.

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