A quick look at the currency charts will show that the yen has rocketed from 110 yen to the dollar this summer to 92.5 as of this posting. Since this question is on my mind, I just want to post a couple of explanations for why this is happening.
Almost Overnight, Yen Is King Of Currencies
The dollar lost 7 yen in one day alone, the biggest single-day drop since October 1998, when the greenback plunged some 12 yen due partly to the financial troubles of a leading U.S. hedge fund. The euro zone currency and pound suffered drops of 14 yen and 20 yen, respectively.
In the blink of an eye, the yen has become one of the strongest currencies in the world. With the U.S. financial crisis spilling over into Europe and emerging nations, investors seeking out high yields and strong growth have pulled money out of their investments in droves. They are instead taking refuge in the yen, since the Japanese financial market is relatively stable.
Oct. 24 (Bloomberg) — The yen climbed to a 13-year high against the dollar as a worldwide drop in stocks encouraged investors to dump higher-yielding assets and pay back low-cost loans in Japan.
Japan’s currency surged to the strongest in six years against the euro as the prospect of a deepening global recession prompted the unwinding of carry trades (ed: currency investments that seek to profit from differences in interest rates between currencies). The pound fell below $1.53 after the U.K. economy shrank in the third quarter. The dollar rose to a two-year high versus the euro as investors sought refuge in the greenback.
“It’s time to hunker down for the winter,” said Scott Ainsbury, a portfolio manager who helps manage about $15 billion in currencies at New York-based hedge fund FX Concepts Inc. “It’s a flight to quality. It’s an unwinding of leveraged carry trades. Money is going back to dollars.”
Yen surges as panic grips market
By Peter Garnham
Published: October 24 2008 11:05 | Last updated: October 24 2008 11:05
The yen surged higher on Friday, hitting 13-year highs against the dollar and pound and jumping to a six-year peak against the euro as panic gripped global markets and forced investors to abandon risky positions.
Traders said investors around the world were being forced to liquidate positions in equities, commodities and higher-yielding currencies amid growing evidence that the global economy was headed for a sharp downturn.
I am just wondering how much stronger it will get! An ad for Shukan Bunshun told me to prepare for a world where 70 yen to the dollar seems normal, but I don’t usually turn to them for investment advice… At the very least, the yen might appreciate more in tandem with the worsening economic situation, at which point the govt might try to intervene, but they might not have the money… ARGH this is confusing.