Wednesday, June 26, 2024

Higher interest rates in the US strengthen $ (or depreciate ¥)

Economist: The Japanese yen fell to around ¥160 against the dollar, its weakest level in almost 40 years. The currency has been falling because of the large gap in interest rates between Japan and America. 
  • Investors earning 1% in Japan liquidate their investments, sell ¥ to buy $ to invest in the US where they can earn 5%; or
  • Carry Trade:  Investor's borrow in Japan, sell ¥ and buy $ to invest in the US and earn money on the spread between the cost of borrowing (1%) in ¥ and what they earn on $ investments (5%).
 In both cases, the increase in demand for $ drives up the price of a $ (FX) relative to the ¥.

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