From the October 01, 2010 issue of Futures Magazine • Subscribe!

Yen: The land of the rising currency

Investors always want to have someplace to put their money. Naturally, that means as some assets become more risky, others start looking much better. Such was the case for the Japanese yen this last summer as threats to the global recovery and fears of a double-dip recession wracked investors. The yen quickly became a safe-haven currency. As investors flocked to the yen, we saw it pass 15-year highs and incited currency intervention.

"Basically, we’ve just seen a continual appreciation of the Japanese yen. The reason for that is because U.S. yield are falling. Japan benefits from a large trade surplus that has grown, so that creates a fundamental demand for yen, whereas in the U.S. we run a trade deficit where there’s always a demand to sell dollars," Kathy Lien, director of currency research at GFT, says. She believes Bank of Japan actions will direct the yen going forward saying there will come an "uncle point" where it will have to intervene. She expects to see further strength with the yen trading around 83 by mid-October.

Andrew Wilkinson, senior market analyst at Interactive Brokers, says that while fears of the economy and the possibility of a double-dip recession drove the yen to where it is, factors in China will determine where it goes from here. "We are beginning to see signs that the intended slowdown of events in China has run its course. Now that their slowdown measures have taken effect, it looks like we are past the turning point for activity in China. In other words, we are beginning to expand again," he says. As the Chinese economy increases, demand for the safe-haven yen will diminish. Wilkinson expects a reversal and placed the yen "closer to 90 than to 80."

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