I was reading this article on Bloomber, http://www.bloomberg.com/apps/news?pid=20601087&sid=a10NOlSGIuzQ, and I am confused about a particular statement: “The Dollar Index, which IntercontinentalExchange Inc. uses to track the U.S. currency against its major trading partners, dropped to the lowest level since Sept. 23, 2008, as signs the world’s biggest economy is emerging from recession prompted investors to buy higher-yielding assets.” Could someone explain why the currency is inversly propotionate to the country’s economy? Thanks
When a country does well, it will import more stuff from other countries. This increases demand for foreign currency, causing the foreign currency to appreciate. Consequently, the local currency will depreciate.
Disagree. The US Dollar is moving as a risk trade right now. When the the world economy was spiraling down last year, people were piling their money into US treasuries as an act of safety. To buy US treasuries you generally need US$'s which will cause the USD to strengthen. Now that it appears that we may be out of the recession people are taking on more risk, dumping their treasuries, and selling their US$'s which is reducing the value. USD/CAD for instance is headed towards parity again. Hello Mister Walrus is correct under normal conditions.
I think it is a bit of both. I see the flight to safety for the US $, and with investors more confident, they must be going putting more money as captial outside. Regardless there is an increased demand for foreign currency. I think the economic variables that would have to be checked would be trade deficit surplus and foreign capital deficit/surplus. What do you think
Agree with Walrus - thats what they taught at L2 econ.
I will not agree with Hello Mister Walrus this time. Though disagreement with him is a rare thing. In the current context, nickee has explained it completely. Regarding: “I think the economic variables that would have to be checked would be trade deficit surplus and foreign capital deficit/surplus. What do you think” Also add another variable; Risk Free Interest Rate on deposits in that currency.
Yeah, I guess I was just spitting out the CFA explanation. I agree that there are other things that influence the market as well.
The “higher yielding assets” most likely refer to the yen-carry trade and other carry trades. Yen-Carry trade is where firms/investors borrow dollars and sell them to buy yen to invest in the yen carry trade - this carry trade also exists for other currencies. I’ve also read that as the price of oil goes up, the oil barons in the middle east actually spend more money in Europe than in the US so all of the dollars that they accrue get sold for Euros for purchases in Europe. - this is probably unrelated to the article blurb you posted though. Remember that the US’s interest rates are extremely low and foreign investment is probably flowing out into higher interest (and more “risky”) assets.
quite interesting and more confusing
It’ because investors are selling US dollars (sending index lower) and buy other currencies like EUR where the interest rates (higher yielding currencies) are higher. This type of patter has been going on since a while. Market goes up, dollar down, return to risk.
That does not make sense. The yen-carry trade is when you borrow the low yielding the yen and invest in higher yielding assets (such as the Australian dollar). As the yen carry trade is unwound, banks make calls on the loans, assets are sold to meet the call, and repatriation of the yen causes the borrowed currency to appreciate against the major currencies. A carry trade causes downward pressure on the low yielding currency. Given the fundamentals of the USD and the low interest rate monetary policy implemented by the Fed, I would think the USD has joined the yen as the borrowed asset in the carry trade.
jteel1 Wrote: ------------------------------------------------------- > That does not make sense. The yen-carry trade is > when you borrow the low yielding the yen and > invest in higher yielding assets (such as the > Australian dollar). > > As the yen carry trade is unwound, banks make > calls on the loans, assets are sold to meet the > call, and repatriation of the yen causes the > borrowed currency to appreciate against the major > currencies. > > A carry trade causes downward pressure on the low > yielding currency. Given the fundamentals of the > USD and the low interest rate monetary policy > implemented by the Fed, I would think the USD has > joined the yen as the borrowed asset in the carry > trade. +1. Intention of BoJ to keep low interest rates was to increase liquidity and credit in the economy. But due to “carry trade” in yen, the enhanced liquidity went out of the system to assets in other currencies. This was one of the reasons for Japan’s “lost decade”. USD is expected to follow the same path, if FED keeps near zero interest rates for prolonged time.
jteel1 Wrote: ------------------------------------------------------- > That does not make sense. The yen-carry trade is > when you borrow the low yielding the yen and > invest in higher yielding assets (such as the > Australian dollar). > > As the yen carry trade is unwound, banks make > calls on the loans, assets are sold to meet the > call, and repatriation of the yen causes the > borrowed currency to appreciate against the major > currencies. > > A carry trade causes downward pressure on the low > yielding currency. Given the fundamentals of the > USD and the low interest rate monetary policy > implemented by the Fed, I would think the USD has > joined the yen as the borrowed asset in the carry > trade. OK - i thought the yen carry trade was the other way around - borrow dollars to invest in Yen. Did not know that Yen had a lower interest rate than the dollar.
JAP interest rates have been historically extremely low. The YEN/Kiwi carry trade was a good one last year.
Correct ^ “_____ carry trade” means borrow ______ and invest in higher yield assets or currencies" Yen historically was good b/c gov’t would keep yen low to boost exports and fight deflation. Now with dollar rates so low ppl are flocking to US Dollar carry trade.