The Dow Gets a Case of the Tokyo Two-Step

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News flash: The stock market, never a bastion of considered calm, is chasing its collective tail again. The Dow plummeted 225 points Tuesday, largely on two seemingly opposing fears: one, that the yen was too strong, and the other, that the U.S. trade deficit –- fueled largely by a weak yen –- was too big. It all started overnight when the Fed's counterpart in Tokyo, the Bank of Japan, refused to intervene to keep the yen weak, and thus ensure that Japan’s exports remain cheap on U.S. shores. The announcement sparked an outcry among Japanese politicians fearful that their nation’s nascent economic recovery would evaporate without cheap exports, and got U.S. marketeers –- who have themselves fueled the yen’s rise by pouring money into bargain-priced Japanese assets –- worrying that a weak dollar would spur the Fed to raise interest rates at its October 4 meeting.

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Guess what? It don’t mean much. The Fed won’t budge unless inflation is coming from the domestic front, which by all accounts it isn’t. And the Bank of Japan won’t budge because even if it did intervene and buy some yen in the foreign exchange markets, the move would be quickly overwhelmed by the investors who have suddenly begun to believe in the nation’s recovery. Which leaves the 240-point sell-off as just another round of profit-taking, albeit a dramatic one. "These are the kind of sell-offs you get when the market is skittish about the next board meeting," says TIME Wall Street columnist Daniel Kadlec. But as Kadlec points out, the market is coming off enough recent rallies that it’s "well within its trading range." In other words, nothing to worry too much about. If the yen stays strong, the trade deficit’s record growth should slow. If it weakens, the fear of a U.S. rate hike should similarly subside. And with the Bank of Japan staying on the sidelines (and catching more flak for it than Greenspan ever dreamed of), guess who’ll determine which one happens. Yup –- U.S. investors and currency speculators. Ever get the feeling they’re just messing with our heads?