Dollar's a Safe Haven, Eh? Look at the Yen

♠ Posted by Emmanuel in , at 10/06/2008 05:21:00 PM
The euro slumping below $1.35 as a result of troubles with European financial institutions requiring national bailouts such as Hypo Real Estate in Germany has occupied the attention of currency watchers. However, a far more dramatic move has been made by the Japanese yen, which has strengthened by almost ¥5 against the US dollar in a 24-hour period. Do not adjust your monitor settings; this chart is for real [click for a larger image]. What explains the yen's very spectacular move? Further unwinding of (risky) carry trades funded with yen or Swiss francs--that's for sure. This is illustrated in some way by Icelanders who stand at the edge of the precipice:
Deepening the bite for many Icelanders is that during the good times, many borrowers opted for "basket" loans tied to the yen and Swiss franc, even for auto purchases. Those loans have become disasters, as borrowers need to find ever more fast-devaluing kronur to meet loan payments.
Bottom line: the dollar is not a "safe haven." If such were the case, the yen would be even safer yet. Bloomberg continues with the carry trade unwinding due to deleveraging story:
Japan's currency was the best-performer in September and the only currency to appreciate against the dollar. Deutsche Bank AG, the biggest trader of foreign exchange, says the yen will rise 5 percent in coming months. New York-based Morgan Stanley is telling clients to buy the currency versus the euro and pound.

After seven years of providing the cheapest source of funds for investors buying higher-yielding New Zealand dollars, Australian dollars and Brazil reais, the yen is appreciating as $584 billion of subprime mortgage-related losses force banks to restrict credit. It strengthened 4.4 percent on a trade-weighted basis in September, according to the Bank of Japan's effective exchange rate, the most since August 2007, when the seizure in capital markets began.
After understandably taking a beating as a reserve currency due to its near zero yield in recent years, the yen is making a small comeback in that role:
The percentage of currency reserves held in yen by foreign central banks increased for a third straight quarter through June, according to the International Monetary Fund.

Yen now accounts for 3.4 percent of global reserves, compared with 2.8 percent a year earlier, the lowest amount since at least 1999. The dollar is the world's largest reserve currency at 62.5 percent, IMF figures show. Morgan Stanley strategists said in their Oct. 2 report that the yen may overtake the pound, which is No. 3 at 4.7 percent, in ``coming quarters.''

``There are many risks in the United States and Europe,'' said Satoshi Okumoto, a general manager at Fukoku Mutual Life Insurance Co. in Tokyo, which has $54.1 billion in assets and is Japan's eighth-biggest life insurance company. ``Fund managers are starting to shift their money to yen. They are starting to overweight yen in terms of currency allocation.''