Yen surges to record high against the dollar, threatening Japan’s exporters

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The Japanese yen rocketed to a record high against the dollar in Asian trading early Thursday, challenging the Bank of Japan to take steps to beat back the surge before it does more damage to the country’s exporters.

The dollar initially fell as low as 76.36 yen, down from 79.83 earlier in the day in New York and barreling through the previous post-World War II low of 79.75 reached in 1995. The buck had edged back up to 78.01 yen at about 3:15 PDT.

Just before last Friday’s earthquake the dollar was worth nearly 83 yen.

Though it seems counterintuitive, the yen is rallying in part because of the crisis at Japan’s Fukushima nuclear power complex, as frightened global investors turn to traditionally strong currencies as a place to hide.

The yen also is gaining as currency traders bet that Japanese companies and investors will sell some of their foreign assets to bring money home in the wake of the devastating earthquake and tsunami. A flow of money back to Japan would boost demand for yen.

What’s more, hedge funds and other speculators may be unwinding trades in which they borrowed yen at cheap interest rates to invest in higher-risk investments worldwide. As markets fall and those trades are closed out the speculators must convert assets to yen to pay off the loans.

The problem for Japan is that each tick higher in the yen threatens the country’s industrial base by making Japanese exports more expensive for foreign buyers.

“The crisis caused by the earthquake and tsunami has dealt a significant blow to the Japanese economy and the rapid appreciation of the yen has only made things worse,” said Kathy Lien, head of currency research at GFT Forex in New York.

“With the yen rising so quickly in such a short period of time, it would be negligent for the Bank of Japan not to intervene in the currency even if intervention is usually futile,” she said.

To try to halt the yen’s rise the Bank of Japan could sell yen to buy dollars.

Win Thin, a currency strategist at Brown Bros. Harriman in New York, said that ‘if nothing else, the BOJ could intervene today just to send a signal to the [speculators] that this is not a one-way market.’

-- Tom Petruno