The Rising Yen in a Sea of Falling Currencies

September 1, 2008  

When it seems that the world’s currencies are all falling against the U.S. dollar (USD), there is one currency which has been getting stronger every day: the Japanese yen (JPY). The value of the yen has been rising over the past few days, and today it hit its highest levels in five months.

Japanese Prime Minister Yasuo Fukuda’s resignation today has seemingly had no effect whatsoever on the standing of the yen. Furthermore, the trend is expected to continue: Barclay’s Capital Inc. reported today that “Everything points to further yen strength over the rest of the year.” The same Barclay’s report expects the euro (EURO) to continue to slide.

So why is the yen doing so well, when other major currencies such as the euro and the pound (GBP) are at their lowest in quite a while? The current strengthening of the dollar and the falling of other currencies encourages the yen carry trade to pick up – especially since most of the current currency shifts are due to mortgage crises. In the past, the yen carry trade has caused many problems in the markets, almost imploding numerous times, so it will be interesting to see how this plays out.

For the uninformed, the yen carry trade is a strategy where investors borrow currencies from banks in countries which offer lower interest rates, sell the currencies, and buy up currencies in those countries which offer higher interest. The current popularity of this strategy being blamed for the fall of the USD against the yen, as Japan currently offers a high interest rate. The risk in the strategy can be great though, because if the yen falls in value in relation to the borrowed currency, then investors may be unable to pay back the loans in the other currencies.

If the Barclays report is correct, however, investors have some time before they have to worry about the bubble bursting.