The yen gained broadly on Tuesday as jitters about global credit conditions led investors to shed risky assets funded by borrowing in the Japanese currency. Analysts said investors remained on edge about disorder in credit markets, brought on by losses in bonds backed by risky US mortgage debt. That has prompted investors to unwind carry trades that involve borrowing cheap yen to buy higher-yielding assets and to snap up US Treasury debt, providing a safe-haven bid for the dollar against most major currencies save for the yen. Analyst said "People are willing to accept low yields in exchange for safety right now, and you see that in carry trades."
By Tuesday, markets were pricing in at least two cuts to the Federal Reserve's benchmark federal funds rate by year end. Economists have also pared back expectations of rate hikes by the European Central Bank and the Bank of England.
Yesterday, the Dollar was down 0.34% at 114.43, while the Euro changed hands at 154.12 against Yen, down 0.37% on the day. The high-yielding Australian dollar, a proxy for carry trade appetite, lost also against the yen, falling 0.53% to 91.68.
Sterling and Euro were fairly unchanged against Dollar, respectively down 0.22% to 1.9837 and 0.04% to 1.3468. This is partly the result of US investors repatriating funds into "cash or assets that are good as cash, such as Treasuries".
The Fed has held its benchmark lending rate at 5.25% since June 2006, and Richmond Fed President Jeffrey Lacker said on Tuesday that recent market turmoil is not enough by itself to justify a cut. The central bank cut the discount lending rate at which banks can borrow money directly from the Fed by 50 basis points late last week, but the move appears to have done little to calm market nerves. Also on Tuesday, Treasury Secretary Henry Paulson said in a CNBC Television interview that liquidity would return to normal when investor reassess risk, but warned that the current credit problems would take time to play out. Most market participants now think cuts in the federal funds target rate for overnight inter-bank loans are likely. The Fed may cut by 50 basis points before its next (scheduled) meeting on Sept. 18. Whether a cut does come will hinge on how healthy the global economy remains in the months ahead.