The Japanese currency made a 5th weekly advance today against the U.S. dollar as investor appetite for risky assets has plummeted. Fear of the credit market crisis has sent the yen to its longest winning streak against the dollar since December 2004. Traders have stopped investing in risky assets with loans using cheap yen, thereby unwinding their carry trades. The Japanese currency rose .4 percent to 117.67 per dollar this morning in New York. The yen also made gains against other currencies across the board.
The biggest driver of this yen increase has of course been the U.S. subprime meltdown. Major central banks have finally taken action to alleviate the credit crunch. The European Central Bank made an unprecedented move yesterday of pumping loans into the banking system as the U.S. subprime crisis hit Europe. Yesterday, France’s largest bank, BNP Paribas SA, announced the halting of withdrawals from 3 funds. Today the ECB made loans of 61.05 billion ($83.5 billion) and the U.S. Federal Reserve pumped $19 billion into the banking system to meet increased demand for cash in the fixed-income crisis. The Bank of Japan has taken similar actions by providing loans of 1 trillion yen ($85 million).
Outlook and Strategy:
Central banks have finally felt the need to take action as U.S. subprime mortgage losses have been rippling through the credit markets. Stephen Malyon, co-head of currency strategies at Scotia Capital Inc., comments: “Subprime is clearly not contained. Concerns over the turmoil in global equity and fixed-income markets keep the pressure on the carry trade.†He does not advise betting against the yen right now.
At almost a quarter of GDP, we have finally seen the broader consequences of the U.S. housing slump affecting the U.S. economy. Paul Kasriel, chief economist at Northern Trust Corp., states: “Housing created a lot of ancillary economic activity and jobs, and now we are in the reverse process.†The problem seems to be contagious, not contained as Fed Chairman Ben Bernanke believed on March 28th. Corporations spread as far as countertop makers, railroads, and some fast-food chains have been blaming subprime for lower than expected earnings. If anybody was watching Jim Cramer’s interview on CNBC last week, his frustration with the subprime crisis could not have been more evident.
The subprime mess has spread into the major international banks, especially in Europe where many investments were made in collateralized debt markets. Shares of top 12 U.S. Banks have fallen 17 percent since June 1st. The problem began when mortgage firms, who had packaged loans into securities and sold them to investors, have hit trouble as loans defaulted diminishing investor demand. In addition, these firms had borrowed heavily from banks to buy more loans. But as the defaults increased, banks have been demanding their money back. The credit market is in a very tight spot finally receiving some liquidity from central banks.
But what does this mean for the U.S. dollar? As the Fed continues to make loans, investors will continue to turn away from risky assets. The yen may make more gains against the dollar, especially if the likelihood of a raised interest rate by Japan’s central bank increases.
Posted: August 10th, 2007 under General.
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