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Opinion. Advises that investors should be skeptical about the dollar-yen exchange rate in 1995. False calls about the exchange rate; The Federal Reserve and the Bank of Japan buying dollars and selling yen on a grand scale; How the foreign-exchange marketplace is dominated by currency blocs; How the Asian countries are part of the dollar bloc; The United States trade deficit with Asian countries.

Examines the Asian impact of the weakening of the American dollar. Level of the weakening of the dollar against the yen and the euro; High level of America's current-account deficit; Decline of the value of Asia's dollar assets if the dollar continues to weaken; Concerns by Japan on the impact of a low dollar on Japanese exports; Capital loss by Singapore following a rise in the Singapore dollar; Concerns by South Korea and Taiwan; Reaction of China to the weakening dollar.

The author claims that Asian central banks have prevented the U.S. dollar from falling even more dramatically than it has in recent months, but warns that Asian banks may seek to diversify their holdings. The dollar did pop up briefly on December 9th, after the Bank of Japan apparently intervened to stop the yen rising, but the Japanese central bank has already spent some $168 billion on dollars this year, and the yen has climbed by 11% against the American currency. Perhaps the yen would have risen by more had the Bank of Japan spent less: this week the euro was up by 42% from its lowest point against the dollar and sterling was at its highest since being ejected from Europe's exchange-rate mechanism in 1992. The dollar has been weakening even as America's economy has been picking up sharply. The health of the economy may now be part of the dollar's problem. Americans save so little that their spending must be financed by foreigners, which is why the country's current-account deficit has been rising so swiftly, to half a trillion dollars or so. Until recently, this foreign investment was largely of a private nature; however, as concerns about the scale of the deficit have mounted, private flows have dried up somewhat and central banks have been topping up the stream. Jim O'Neill, Goldman's chief economist, thinks that central banks will increasingly wake up to the benefits of diversification.