The dollar faces a constant headwind in the markets as Japanese exporters convert dollar-based profits back into their home currency. On average, exporters sell $250 mln per day, every day (based on last year’s $60 bln deficit with Japan) just for starters. That’s a $250 bln hole that the dollar has to dig itself out of before it has to contend with other factors like interest rate differentials and its relative strength or weakness against the other major currencies.
For a time, probably the next six months or so, Japanese exports will likely take a hit as rebuilding efforts take precedence. US imports of construction materials and other goods could rise as well. This may give the buck (and the BOJ) some breathing room down the road.
Right now, the market is willing to pick a fight with the BOJ and the rest of the G7 to see if intervention is still a viable contingency in this massive market, one that has trebled in size in the last decade. Central banks have been reluctant to find out if their old tricks still work for fear of finding that they don’t. Once the perception of central bank invincibility is shattered, it won’t be easily won back.
I slightly favor the market winning out over the authorities in the near-term. But there is a lot riding on the authorities early next week: Their ability to influence global exchange rates directly will forever be questioned if they fail. They have their work cut out for them.
It will be no holiday for the BOJ on Monday, that much is for sure.
