THE yen rallied for a fourth consecutive day on Thursday (Jul 25), reaching a six-week high, as traders ditched their long-running bets against the currency and a plunge in global stocks drove investors towards traditionally safe assets.
“This is a case of so many people all trying to find the door all at the same time,” said Jane Foley, head of FX strategy at lender Rabobank. “It seemed like everybody and his dog was shorting the yen; it was the funding currency for the carry trade.”
Investors had been heavily shorting – or betting against – the yen, seeing little chance of the yawning interest rate gap between Japan and the United States closing meaningfully. That gap has made US bonds and the dollar look attractive and pushed the yen to a 38-year low earlier this month, prompting intervention from the authorities.
Those assumptions have suddenly been questioned this week. Sources told Reuters that the Bank of Japan is likely to debate whether to raise interest rates next week, while traders increasingly expect cuts by the US Federal Reserve.
The yen was also supported on Thursday by its traditional role as a safe-haven currency, as a tech-led sell-off in global stocks continued.
The US dollar trimmed losses on Thursday after data showed that the world’s largest economy expanded faster than expected and inflation slowed in the second quarter.
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The greenback came off lows against the surging yen and was last down 0.4 per cent at 153.16. It was at 152.68 yen before the data. The dollar index, which tracks the US currency against six others, was slightly down at 104.32 after the data. It was at 104.21 just before.
Advance estimates showed that gross domestic product grew at a 2.8 per cent annualised rate last quarter. Economists polled by Reuters had forecast GDP rising at a 2 per cent rate.
Investors have been rapidly backing out of so-called carry trades, in which they had been borrowing low-yielding currencies to buy higher yielders like the US dollar. As investors undo those trades they have been buying back the yen, catapulting it higher.
China’s yuan rallied as much as 0.8 per cent, caught up in the yen rally and benefiting from bets on Fed rate cuts, and hit its highest since May at 7.205 per US dollar.
The rise came even as the country’s central bank surprised markets for a second time this week by conducting an unscheduled lending operation on Thursday at steeply lower rates – more monetary stimulus to prop up the economy.
Investors’ risk aversion took a toll on the Australian and New Zealand dollars, which were already under pressure from weakening commodity prices. The Australian dollar tumbled 0.9 per cent to US$0.6519, its lowest since early May.
The unwinding of carry trades has also helped the low-yielding Swiss franc this week. The US dollar was last down 0.84 per cent against the franc, its lowest since early March at 0.8777.
Although the US dollar often rises during a stock sell-off, analysts said that mounting expectations for a Fed interest rate cut were pulling in the other direction.
The euro inched up 0.1 per cent to US$1.0847, while the sterling was down 0.25 per cent at US$1.2874.
Former New York Fed president Bill Dudley said the Fed should cut rates next week in a Bloomberg column on Wednesday, citing recent employment data.
Traders now expect almost three 25-basis-point reductions by December.
“If today’s focus is on lower US rates, then the dollar should come lower across the board,” said Chris Turner, global head of markets at ING. REUTERS
