This link has been bookmarked by 1 people . It was first bookmarked on 06 Jul 2008, by Michael.
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06 Jul 08
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When the line is near the peak, a lot of currencies are outperforming the yen, indicating that investors are feeling confident. When the line is low, the yen is beating most other countries and investors are nervous.
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What makes the yen so special? There seem to be two reasons. One is that investors usually have a currency they regard as safe, preferably one from a country that has low inflation and a trade surplus. The yen fits the bill on that count while the dollar definitely does not. The second is that Japan has very low interest rates. This makes the yen a perfect vehicle for the “carry trade”, in which investors borrow money in a low-yielding currency to invest in a higher-yielding asset. Those assets are more risky, so when aversion rises, investors end up buying back the yen they have borrowed.
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Indeed, while a lot of people were worrying about the potential for a carry-trade collapse 18 months ago, it has largely disappeared from investors' radar screen as a topic for discussion. The health of the banking system and high commodity prices have seemed like more important things to worry about
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Perhaps this is a sign that there is more liquidity than we might think, despite the credit crunch. The crunch is certainly having an impact in Europe and America, where consumers and (more recently) companies are having difficulty getting access to capital. But there is plenty of money sloshing around in Asia and in the oil-producing nations of the Middle East. That is hardly surprising since real interest rates are negative in most of those countries (in other words, short rates are below the inflation rate).
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