Currency turmoil in the spotlight as yen gains strength
Currency turmoil in the spotlight as yen gains strength
Falling currencies got some respite yesterday as yen took a breather from its steep rise
By Erica Tay, Economics Correspondent
MOST of the attention in the past week of eye-popping market chaos has centred on worrisome home loan defaults in the United States known as sub-prime mortgages.
However, another less visible - but potentially more serious - problem is battering markets in a second wave of grim news.
Massive loans by big investors taken out in the Japanese currency to fund purchases around the world are unravelling as jittery investors cash out of risky assets.
The reason yen loans were so attractive is that Japanese interest rates and the yen were relatively low - but all that is changing fast.
The dumping by nervous investors of high-yielding assets funded by these cheap yen loans led to massive turbulence in currency markets over the past week.
The Japanese unit surged against the euro, sterling and US dollar, as well as Asian currencies. The South Korean won, Indonesian rupiah and Philippine peso were among the regional currencies that took the biggest hit.
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Rising Yen
High-interest units such as the Australian and New Zealand dollars dropped the most - with the Aussie losing 17 per cent against the yen and the kiwi slumping 24 per cent in less than a month.
Late yesterday, tumbling currencies saw some respite as the Japanese unit took a breather from its steep rise.
The yen retreated from its morning peaks of 112 yen per US dollar, 86 yen per Australian dollar and S$1.38 per 100 yen.
By late last night, the greenback bought about 114 yen, Australian dollar 88 yen and the Singdollar traded at S$1.36 per 100 yen.
The Singdollar has lost around 9 per cent against the yen in the last three weeks.
However, market watchers warn that the yen's rise could resume next Monday, as currency speculators ride on the unravelling of so-called 'carry trades' and put further upward pressure on the Japanese unit.
'Clearly, when the carry trades out there have been unwound, there would also be people riding on the momentum and selling any high-yielding currencies,' said Fortis Bank strategist Joseph Tan.
On the other hand, he added, the yen's turnaround late yesterday was 'miraculous', and it points to an opposite force - possible intervention by Asian central banks to support their own currencies.
The Reserve Bank of Australia and the New Zealand central bank were also observed intervening in the currency market, he added.
The yen carry trade, or the practice of borrowing in the low-interest Japanese currency and investing in assets elsewhere, has been a key source of liquidity for global markets.
Its unwinding will lead to a further reduction in cash available for investments, at a time when banks are pulling back on lending, as risk aversion increases. If the trend continues, there is a risk of financial market turmoil spilling over to the real economy, say economists.
'The problem is no longer limited to the sub-prime market or the credit market - it has become a liquidity issue. We are very close to the line where financial market trouble tips over into trouble for the real economy,' United Overseas Bank economist Jimmy Koh said.
'If this bout of risk aversion blows over soon enough, and the market consolidates soon enough, it won't be an issue for the economy,' said Fortis Bank's Mr Tan. 'The problem is if it slumps into a bear market, then there is the risk of a recession.'
Falling currencies got some respite yesterday as yen took a breather from its steep rise
By Erica Tay, Economics Correspondent
MOST of the attention in the past week of eye-popping market chaos has centred on worrisome home loan defaults in the United States known as sub-prime mortgages.
However, another less visible - but potentially more serious - problem is battering markets in a second wave of grim news.
Massive loans by big investors taken out in the Japanese currency to fund purchases around the world are unravelling as jittery investors cash out of risky assets.
The reason yen loans were so attractive is that Japanese interest rates and the yen were relatively low - but all that is changing fast.
The dumping by nervous investors of high-yielding assets funded by these cheap yen loans led to massive turbulence in currency markets over the past week.
The Japanese unit surged against the euro, sterling and US dollar, as well as Asian currencies. The South Korean won, Indonesian rupiah and Philippine peso were among the regional currencies that took the biggest hit.
RELATED LINKS
Rising Yen
High-interest units such as the Australian and New Zealand dollars dropped the most - with the Aussie losing 17 per cent against the yen and the kiwi slumping 24 per cent in less than a month.
Late yesterday, tumbling currencies saw some respite as the Japanese unit took a breather from its steep rise.
The yen retreated from its morning peaks of 112 yen per US dollar, 86 yen per Australian dollar and S$1.38 per 100 yen.
By late last night, the greenback bought about 114 yen, Australian dollar 88 yen and the Singdollar traded at S$1.36 per 100 yen.
The Singdollar has lost around 9 per cent against the yen in the last three weeks.
However, market watchers warn that the yen's rise could resume next Monday, as currency speculators ride on the unravelling of so-called 'carry trades' and put further upward pressure on the Japanese unit.
'Clearly, when the carry trades out there have been unwound, there would also be people riding on the momentum and selling any high-yielding currencies,' said Fortis Bank strategist Joseph Tan.
On the other hand, he added, the yen's turnaround late yesterday was 'miraculous', and it points to an opposite force - possible intervention by Asian central banks to support their own currencies.
The Reserve Bank of Australia and the New Zealand central bank were also observed intervening in the currency market, he added.
The yen carry trade, or the practice of borrowing in the low-interest Japanese currency and investing in assets elsewhere, has been a key source of liquidity for global markets.
Its unwinding will lead to a further reduction in cash available for investments, at a time when banks are pulling back on lending, as risk aversion increases. If the trend continues, there is a risk of financial market turmoil spilling over to the real economy, say economists.
'The problem is no longer limited to the sub-prime market or the credit market - it has become a liquidity issue. We are very close to the line where financial market trouble tips over into trouble for the real economy,' United Overseas Bank economist Jimmy Koh said.
'If this bout of risk aversion blows over soon enough, and the market consolidates soon enough, it won't be an issue for the economy,' said Fortis Bank's Mr Tan. 'The problem is if it slumps into a bear market, then there is the risk of a recession.'
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