Carry Trades Unwind Pushing Yen and US Dollar Up

Posted February 24, 2010

The Japanese yen and the US dollar strengthened as carry trades unwind in view of falling confidence indices around the world. The Canadian dollar fell against the US dollar as oil prices dropped. Most Latin American currencies weakened against the US dollar. South Africa’s rand advanced by .9 percent against the US dollar.


The currency market volatility continued with the yen strengthening against the US dollar yesterday to 90.21 yen per US dollar. The Japanese yen rose as investors returned to safe haven assets on signs the global recovery is faltering.

In the US the consumer confidence index fell to 46 which took most economists and market analysts by surprise. This was a significant drop from the 56.5 reported in January. As unemployment continues to remain close to 10 percent and the US Congress appears to be in gridlock, consumer confidence has nosedived.

The US dollar rose to $1.3508 against the euro. Europe is dealing with its own dismal financial conditions. The German business confidence index fell in February to 95.2 when it had been expected to go up. The euro is under considerable pressure as Greece, Spain, and Portugal try to implement budget deficit reducing measures.

Greece has reassured the world once again that it will adhere to a 3-year deficit reduction plan.

Germany’s Chancellor Angela Merkel spoke in defense of the euro. She said that the members of the European Union must adhere to the EU rules as quickly as possible and restore confidence in the euro. She was vocal about the fact that the institutions causing the recession, and then rescued with government funds, are the same ones now speculating on euro weakness. The speculation is not good for the common currency or the EU in general.

The Japanese yen and US dollar strengthened as carry trades are unwound. A carry trade is a transaction in which investors buy currencies of countries with higher interest rates using the currencies of countries with lower interest rates. For example, an investor might buy currencies in Brazil and Australia using the US dollar or Japanese yen.  Carry trades have a high amount risk embedded because the value of the currencies can change suddenly and without notice. Leveraged trades can lead to large losses.

The Canadian dollar weakened on the drop in the US consumer confidence index. The loonie fell to C$1.0564 against the US dollar. One Canadian dollar will buy 94.66 US cents.

Also affecting the Canadian dollar value is a fall in oil prices to $78.73 per barrel for April deliveries.
Argentina’s peso held steady at 3.8606 peso per US dollar. The country is trying to develop a plan for restructuring its defaulted debt. The Economy Minister Amado Boudou has been leading the restructuring efforts but now there is talk he might be leaving his position. Bonds fell to a 5-month low.

Columbia’s peso weakened to 1,929.65 pesos per US dollar. Chile’s peso fell to 529 pesos per US dollar. Peru’s sol also fell to 2.8505 sols per US dollar.

The South African rand strengthened to 7.6538 rands per US dollar. This represents a .9 percent increase making it the best performing emerging market currency yesterday. The increase was due to a report that the fourth quarter 2009 GDP grew more than it has since 2008 at 3.2 percent.