Recent talks by Federal Reserve Vice Chairman Donald Kohn about possible interest rates cut by the Fed added confidence to the Forex market traders that rely on buying risky currencies with the cheap low risk Japanese yen – so called carry traders.
Worried by the high possibility of U.S. economy recession (stated by all major U.S. banks) Federal Reserve might go for another rate cut on December 11 meeting. Cutting rates now would help those financial institutions that suffered from subprime lending crisis to recover faster, returning global risks and volatility back to the normal state. Increased confidence in the financial markets spurred the carry trade, which was almost stagnant after yen fast appreciation on global risks rising.
Japanese yen lost to all other major currencies on Forex as the carry traders decided to return to the high-yielding instruments – such as EUR/JPY and GBP/JPY. Even ZAR/JPY, with South African rand considered as one of the riskiest currency, gained more than 0.7% percents yesterday after more than two weeks of consequent losses – almost 10% interest rate for holding this currency pair long helps a lot.
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