Yen Gains as Rate Cut Indicate Problems

  October 31st, 2008 at 12:20, Andriy Moraru

Japanese yenThe Japanese yen gained versus the dollar, the euro and the pound today after the traders saw the signals of more troubles in the global financial system as the Bank of Japan cut the interest rate.

The Bank of Japan cut the rate by 20 basis points today — lowering it from 0.5 percent to 0.3 percent, with three of the eight board members voting for reducing the rate to 0.25 percent. Investors saw the fear of the worsening of the current situation in the world’s economy in this decision.

The Japanese yen rose against its traditional carry trade counterparts — the Australian and New Zealand dollars as the commodity prices fell with the increased economical risks. The growth of the yen against the U.S. dollar was largely dictated by the the interest rate decision, which made the yen an ultimate safe haven reserve currency.

The current growth of the low-risk currencies (such as the yen and the greenback) is amplified by the two main sources — moving the assets to safety and the sale of the assets that were bought by the U.S. and Japanese investors and involved currency conversion. The second source isn’t infinite and when the vast majority of such assets are sold, the growth of the yen and the U.S. dollar will slow down significantly.

USD/JPY fell from 98.62 to 97.05 as of 10:16 GMT today. EUR/JPY went down from 126.98 to 123.60 and GBP/JPY declined from 161.51 to 156.53 today.

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