Dollar tumble spells trouble for yen trade - Times Online

Dollar tumble spells trouble for yen trade - Times Online

Deepening misery on Wall Street, prophesies of recession and the recent freefall of the dollar could set off a $300 billion (£148 billion) time bomb in the global yen carry trade, dealers are giving warning.

The carry trade, which involves cheaply borrowing the Japanese currency to buy other assets, comes unstuck in volatile currency markets. If the carry trade does implode, sending the yen to new heights against a wide basket of currencies, dealers say that the cast of victims could include individuals, corporates and hedge funds.

The yen is at a 12-year high against the greenback and Tokyo-based economists are speculating that a severe crash in the carry trade could trigger a more devastating ruction in the $1 trillion overseas investments of Japanese mutual funds as the dollar/yen exchange rate edges towards the pain threshold of individual investors.

Hedge funds have long used the carry trade for cheap leverage, but there are also thought to be vast exposures to yen volatility in the Thai, Korean and Indonesian banking sectors, where the Japanese currency has been borrowed heavily to meet funding needs. The British banking sector turned to a version of the carry trade - yen-denominated bond issuance - when credit conditions tightened around the Northern Rock crisis. Indian banks' use of the carry trade surged 180per cent between 2005 and 2007. Because the trade has been so popular, Goldman Sachs analysts said yesterday that the sharp fall in the US dollar against the yen had prompted them to reassess the “cash-call risks” for Asian banks and corporates.