Dollar-Yen Crushes Carry Trade Expectations at Seven-Month Low

The dollar-yen exchange rate has fallen to its lowest level since February, breaking the script of the carry trade. The pair traded at 154.35 on Monday, down 1.18% on the day after touching 154.05 intraday.

This move is significant because it comes despite a strong August jobs report in the US, which typically pushes the dollar higher against the yen. Treasury yields have also risen, and traders now expect a Federal Reserve rate hike this month with odds at roughly 60%.

JPMorgan strategists had warned that if dollar-yen trades through 155, there was a risk of selling begetting further selling. They estimated that between $16 trillion to $17 trillion yen of bearish yen positions were still outstanding in the market.

The carry trade is based on borrowing in a currency with low interest rates and investing in one with high yields, collecting the difference as long as the gap stays wide and the exchange rate remains stable. However, this gap is shrinking from the Japanese side due to rising Treasury yields in Japan.