Will Yen Rally Further??
Yen has moved to 15-year high against Dollar and it seems it is not ready to stop here.
Recent developments in world economies have lead dollar to lose its value more than any other currency of the world. Very obvious reason for this behaviour of USDYEN is bleaker prospects of recovery in US which is getting more and more confirmed with every passing day. Recent statement from White House that they will spend another $ 3 Billion to help house owners is in fact another instance of financial weakness still prevalent with US consumers. Trade deficit of US widened last month to highs of October 2008. Economic indicators have been successful in indicating it to investors that it time to move away from dollar or at least diversify the investment in order to be on safer side.
Other major currencies of the world which are left now are EURO, GBP and YEN. Euro is itself in a big mess and trying to recover from it, so it would not attract investors much. GBP could have been a good currency to hold if Britain wouldn’t be living on such a huge debt that it was being considered by investment rating agencies to be downgraded, though nothing as such happened.
Japan has been slow of development but seems to be the safest bet among the lot. Yen is widely traded in foreign exchange markets and is a major currency. All the more, Japanese debt are owned mostly by Japanese investors. Japanese bond market is closed and Yen has been appreciating against Dollar in past times. All these factors add up to increase in value of Yen against Dollar.
But there is one more major reason which is slowly becoming cause of severe headache for Japanese Government and export industry of Japan. It is China. China is buying into Japanese assets. In June China bought $5.3 Billion of Japanese assets and it already holds Japanese assets worth $20 Billion. As China is diversifying its holdings away from Dollar, Yen has been getting stronger by increased investors’ confidence in it. Now investors fear that China with huge reserves can buy more Japanese assets in future and further cause USDYEN to decline. Shares of export based companies fell in NIKKEI 225 on anticipation of further downslide in value of Dollar against Yen as Japanese export industry take a big hit and this may well be reflected in the earnings of these companies when they come out next quarter.