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Yen Poised to Surge, Ending Dollar Dominance
27 May
Summary
- Yen is a historically preferred funding currency for carry trades.
- Dynamics are shifting, suggesting a potential yen strengthening.
- This shift could reverse months of yen underperformance.
The Japanese yen, long the cornerstone of global carry trades, is showing signs of a significant shift. Historically, investors have utilized the yen as a funding currency, borrowing it at low interest rates to invest in higher-yielding assets elsewhere. This strategy has been profitable due to the yen's sustained weakness against major currencies like the US dollar.
However, current market dynamics suggest a potential about-face. Analysts anticipate the yen strengthening against the US dollar, a move that could reverse months of underperformance. This predicted appreciation poses a considerable risk to existing carry trades, potentially leading to substantial losses for those who have bet on continued yen weakness.
