Friday, August 17, 2007

Yen Carry Trades Unwind

Bloomberg reports:

Yen Rises Most Versus Dollar Since 1998 as Carry Trades Unwind

Aug. 16 (Bloomberg) -- The yen advanced the most against the dollar since 1998 as a global rout of stocks and credit markets pushed investors to sell riskier assets funded by loans in Japan.

The yen is the strongest most-actively traded currency today as the carry trades unwound. Global stocks tumbled and companies from Australia to Canada sought emergency funds as they were unable to refinance debt. The last time the carry trade crashed was in 1998 after Russia's debt default in August. The yen gained 20 percent in less than two months.

``The market is in panic mode,'' said Michael Woolfolk, senior currency strategist at the Bank of New York Mellon in New York, the world's largest custodian bank with over $20 trillion in assets under administration. ``It is a full-blown unwinding of the carry trade. This is just the beginning.''

The Japanese currency advanced 3.9 percent, the most since a 6.7 percent increase on Oct. 7, 1998, to 112.05 per dollar at 1:01 p.m. in New York and earlier reached 112.01, the strongest since June 2006. The yen also gained 4.1 percent to 150.33 per euro and touched 150.03, the highest since November.

Japan's yen has rebounded from a record low of 168.99 per euro on July 23, and 124.13 per dollar on June 22, the weakest since December 2002.

The yen climbed to 75.41 against New Zealand's dollar from 82.78 yesterday. It has risen 17.1 percent so far this week. The yen gained to 87.99 versus Australia's dollar from 95.62. The Australian and New Zealand currencies are carry-trade favorites, with benchmark interest rates at 6.5 percent and 8.25 percent, respectively. Japan's borrowing costs of 0.5 percent are the lowest among major economies.

Philadelphia Report

Gains in the yen accelerated after the Federal Reserve Bank of Philadelphia's general economic index fell to zero in August, the dividing line between expansion and contraction, from 9.2 in July. Economists in a Bloomberg survey had forecast a reading of 8.6. The report deepened the declines in U.S. stocks, adding to the unwinding of the carry trade.

``This is just another piece to pound on the markets,'' said Brian Dolan, chief currency strategist at, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey. ``The carry trade is dead for the time being.''

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