The yen lurched to its lowest in nearly seven years against the dollar yesterday and was seen sliding further, amid speculation the US may be forced to tolerate the loss of competitiveness due to its strong currency.
Main European bourses extended gains with Amsterdam, Frankfurt and Paris breaking into new high ground. Business was thin due to bank holidays in Britain and the United States.
''If we don't see intervention from the Bank of Japan, further gains to 138 and above cannot be ruled out,'' said Klaus Kusber, analyst at Dresdner Kleinwort Benson in Frankfurt.
Yen losses were triggered after yesterday's issue of US News & World Report said US Treasury Secretary Robert Rubin was willing to let the yen weaken to 140 or even 150 per dollar if that was the only way to keep Japan's economy from collapsing.
Bearishness was fanned as Rubin passed up an opportunity to deny the report and instead stuck to his oft-repeated statement that a strong dollar was in the US interests.
''It may seem strange the US is still underlining it is interested in a strong dollar policy when its trade deficit is widening but there is no other chance of stimulating the Japanese economy and the Asian region,'' said Stefan Schilbe, economist at Trinkaus & Burkhardt in Duesseldorf.
The dollar rose as high as 137.15 yen, its strongest since August 1991, while the mark rallied to 77.86 yen, its best showing since January 1993.
With trading volumes depressed by British and US holidays, the dollar was around 137 yen at 1545 GMT from 135.5 late in Europe on Friday. Mark/yen was at 77.63 from 77.22 on Friday.
Peter Dixon, economist at Commerzbank in Frankfurt, said he expected to see the Bank of Japan intervene if the dollar threatened to top 140 yen. Wariness of intervention grew in the wake of Japanese officials' remarks.
Prime Minister Ryutaro Hashimoto said he was not happy about the recent weakness of the yen while the country's Vice Finance Minister, Koji Tanami, said Japan would act against yen weakness.
The risk that yen weakness could trigger a new round of weakness in Asian regional currencies was cited by analysts as one of the reasons why the Bank of Japan could intervene.
Meantime, minor profit-taking in mark/yen helped bolster dollar/mark within narrow ranges.
German export and producer price reports for April which indicated inflation is likely to remain in check also underpinned the dollar against the mark.
Elsewhere in Europe, the mark was supported against the Swedish crown after Riksbank Governor Urban Backstrom said he did not rule out a cut in interest rates.
The economic data had little impact on German shares. The floor DAX-30 closed at a new record high of 5575.16 points, up 10.95 points or 0.20%. The Xetra DAX index of 30 blue-chip shares also closed at a record high, up 1.13%, led by SKW Trostberg and Daimler-Benz.
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