¬∑Dollar wins in
crisisYen soars on unwinding of carry trades
EMU and financing problems burden Eastern European currencies
Yen and dollar surge
dollar and the yen in particular surged this week. The US
currency gained almost 6% against the
euro to around 1.26, and the yen more than 14% to 116JPY per euro. The pound
sterling, the New
Zealand dollar and the
Australian dollar also plummeted by about 10% against the dollar. On Friday,
the Danish central bank raised its key interest rate by 50 basis points to
5.50% to support the exchange rate of the Danish krone against the euro.
emerging market currencies, particularly Eastern European currencies, but
others too, were even
harder hit. The Polish zloty tumbled over 12% against the dollar, the Turkish
lira did likewise. The South African rand plunged about 10%, and the Hungarian
forint over 8%, despite a 300 bp rise in interest rates. The Brazilian real also
took a battering, falling about 11%. The sharp slide is mainly due to
international investors unwinding positions in riskier assets. This appears to
be supporting the dollar, as for many institutional investors, regardless of whether
they are within or without the US dollar currency area, the dollar is their
reference currency. What seems rather unconvincing, however, is the argument
that the US
are taking more decisive action than other countries, particularly the EU. The
numerous monetary and fiscal policy initiatives in the US
could just as well be regarded as evidence of the immense pressure to act or
the extent of the crisis. The election campaign and easy access to budgets of
billions of dollars are probably prompting politicians to act too.
yen seems to be in a special position: on the one hand, the Japanese banks
appear to be
more robust than their competitors in other countries. On the other hand, there
is evidence that carry trades are being unwound on a large scale: Japanese
investors, who, because of the extremely low interest rates of the yen, have been
investing in higher yielding currencies for years, have become nervous in view
of the financial crisis and are now getting rid of their foreign currency assets.
Furthermore, the yen was also popular with foreigners, from hedge funds to house
builders, as a financing currency. In the wake of the financial crisis,
however, it has become more difficult and more expensive to (re)finance these
positions; furthermore the sharp appreciation of the yen has probably caused
significant losses. At any rate, the combination of the
Japanese selling foreign currency assets and foreigners closing or hedging yen
short positions is pushing up demand for the yen, resulting in particularly
sharp exchange rate reactions in the currently
rather illiquid forex markets.
regards the Eastern European emerging markets, several factors are converging:
on the one hand,
when problems in the industrialized countries in the EU increase, investors are
bound to focus on Eastern Europe.
Growth in Eastern Europe,
the ‚Äúworkbench‚ÄĚ of the West, depends to a large extent on demand in the
industrialized countries. On the other hand, domestic demand in the Eastern
European countries has benefited for years from very favourable financing
conditions: the high growth rates, higher yields and firm currencies attracted
international investors and also gave banks favourable refinancing conditions. Easy
access to financing, often coupled with a property boom, has led to a sharp
rise in corporate, private household debt in most countries. In some countries
foreign currency loans also play a major role (over 50% of private household
debt in Lithuania,
and just under 30% in Poland.
the boot is on the other foot: the general flight from risk is making itself
felt in the emerging markets; more and more institutional and private investors
are getting rid of assets. The equity markets, which had previously benefited from
strong international interest, have collapsed; the bond markets have been hit
by much wider credit spreads and growing mistrust in local currencies. All
this, plus the gloomier economic outlook, is having a direct impact on exchange
rates. Countries with high current account deficits, which applies to most
Eastern European countries, appear to be particularly vulnerable.
the present environment, it is extremely difficult to forecast how exchange
rates will develop. Basically, the following pattern seems to be applying at
present: stabilizing tendencies are giving the euro and other currencies some
breathing space, while an escalation of the crisis is leading to further
unwinding of risky positions and consequently to the appreciation of the yen
and the dollar. The crisis has now developed a momentum of its own, making it
difficult to stop the economic downward movement. On the other hand, the
political measures implemented so far should not be underestimated, even if
their full impact is not felt immediately. In the medium term, the bundle of
measures including further massive interest rate cuts, financial sector
protection and economic stimulus programmes should help to stabilize the global
Rieke +49 69 718-4114
Grabbe / Klaus N√§fken
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