In These New Times

This clarifies things greatly : both the dollar and the yen have been vehicles for “carry trades” with London at the their heart. Both currencies have surged massively against the pound in particular as these speculations unravel.

Peter Garnham

FT

24th October, 2008

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.

This rise in risk aversion benefited the low-yielding yen as, prior to the crisis currently engulfing financial markets, it had been widely sold to finance the purchase of higher-yielding, riskier assets elsewhere.

Lee Hardman at Bank of Tokyo-Mitsubishi UFJ said the yen’s gains reflected the prevalence of risk aversion, recession and repatriation.

He said the yen continued to derive support from the looming prospect of long and deep global recession which undermines the appetite for investors’ to re-establish risky positions.

“In fact, given current market conditions it is more likely that investors will continue to deleverage for the foreseeable future prompting the unwinding of long risky asset positions funded through short yen positions,” said Mr Hardman.

In addition, he said, the precipitous declines in the Japanese equities were likely to fuel yen supportive repatriation flows from Japanese investors.

“It has created a perfect storm scenario which has lead to exceptional yen gains in both magnitude and pace,” said Mr Hardman.

The yen rose 6.6 per cent to Y91.30 against the dollar, climbed 10.2 per to Y113.90 against the euro and gained 12.5 per cent to Y139.80 against the pound.

Higher-yielding currencies fared even worse against the yen.

The yen rose 15.4 per cent to Y55.94 against the Australian dollar and climbed 13.4 per cent to Y50.80 against the New Zealand dollar.

The pace of the yen’s rise raised some speculation that the Japanese authorities would seek to intervene to stem the currency’s rise.

“I worry that the speed of this move has raised the chance of Japanese intervention in some form soon,” said Maurice Pomery at IDEAGlobal.

“We have heard very little from the authorities but there has always been action if the rise in the yen hits the domestic economy and it looks like it is hitting hard now.”

Meanwhile, the dollar, which like the yen has been used as a funding currency, surged higher as investors unwound positions and returned to cash.

The dollar rose 6.1 per cent to $1.5315 against the pound, climbed 3.5 per cent to $1.2508 against the euro and gained 3.1 per cent to C$1.2820 against the Canadian dollar.

Emerging markets were also hit as fears over global growth continued to undermine their currencies.

The Korean won fell 1.5 per cent to Won1,422.40 against the dollar, the South African rand dropped 3.3 per cent to R11.2995 while the Hungarian forint lost 3.2 per cent to Ft221.89.