Yen's Rise Threatens Global Carry Trade Stability
The global carry trade is facing a test as the yen continues to strengthen, causing investors to worry about an orderly adjustment turning into a shock.
The yen carry trade involves borrowing Japanese yen at low interest rates, converting it into higher-yielding currencies, and investing in assets such as government bonds or other financial instruments. Investors profit from the interest-rate difference and may earn additional returns if the yen weakens. However, when the yen strengthens sharply, repaying the yen-denominated loan becomes more expensive, and investors may be forced to close their positions quickly.
The yen has reached a seven-month high as markets price in a Bank of Japan rate hike. This increase is also driven by oil prices nearing $100 amid Iran-US tensions and stronger global growth. The US dollar remains volatile due to rising rate-hike expectations, while the strength of the yen, inflation risks, oil prices, and central-bank policy shape currency markets.