LONDON, Sept 18: The dollar held firm against the euro and zig-zagged against the yen on Wednesday as the market struggled to fathom Japan’s latest plans to counter deflation and to assess the risk of strikes on Iraq.

Investors also fretted over the likelihood of a weak Wall Street opening later as key futures indices pointed south following a selloff in the previous session.

The greenback initially raced higher against the yen on Wednesday after the Bank of Japan, moving to allay fears of a financial crisis, said it would buy shares direct from banks as a way of helping them reduce risks from their shareholdings.

The plan was seen as an attempt to pull Japan’s flagging economy out of the doldrums. But the market initially took it as an act of desperation that might hit the credibility of the BOJ and investors chased the dollar up against the yen to 123.07.

The dollar bounced too far one way and is just coming back, said John Calverley, chief economist and strategist at American Express Bank.

The yen later recovered to stand unchanged on the day at 121.86.

The dollar, which has had a rollercoaster ride in recent days, was firm on the day at $0.9725 per euro, although it has retraced a cent from a three-month peak set on Tuesday in the wake of soft US industrial output data and Wall Street losses.

The dollar rallied sharply on Tuesday following news that Iraq would admit UN weapons inspectors unconditionally, averting the immediate threat of a military strike.

The relief rally in the dollar yesterday didn’t last for long after the poor US data. There seems to be no clear resolution on the Iraq issue and this morning people are wondering what will happen next, said Henry Wilkes, head of the trading desk at Brown Brothers Harriman.

The market showed little reaction to news euro zone inflation jumped to 2.1 per cent in August year-on-year, exceeding the European Central Bank’s two per cent ceiling and underscoring the view the bank would keep rates on hold for a while.

Dealers also said an unexpected fall of 1.0 per cent in French industrial output for July made no ripples in the market.

The BOJ left its main monetary policy unchanged but said it would consider directly buying stocks from banks as a measure to prompt the disposal of banks’ massive shareholdings.

At the end of the day the situation in Japan warrants radical policy decisions like the one taken today, said Derek Halpenny, currency economist at Bank of Tokyo Mitsubishi.

The announcement pulled Tokyo’s Nikkei share average off its lows in late trade as banking shares rebounded, but analysts warned Japan could just be delaying much needed structural reform.

The analysts say the plan is an exercise to maintain liquidity within banks to encourage them to lend more, because their weakening stock holdings were a restraint to lending.

Japanese stocks are close to 19-year lows, forcing banks to take less risk as equity portfolios are weakening.

However, they also said it was difficult to assess the longer term foreign exchange implications of the plan.

Calverley at American Express Bank said it looked to be a positive for Japan but probably a negative for the yen itself.

I can’t quite see why this should move the yen stronger because what’s tended to keep the yen too strong has been the movement of money back into Japan by institutions to plug the balance sheets. If this helps plug the balance sheets it makes it easier for the yen to weaken.—Reuters