Japanese Yen

When the credit crisis kicked off in 2007, several analysts quietly began to circulate the theory of "decoupling," which asserted the global economy was strong enough to weather a downturn in the US economy. In other words, it was expected that the credit crisis would be contained within the US, and the rest of the world would plod along, unaffected. This notion now appears to be completely without merit, except in a few isolated cases.

When the credit crisis kicked off in 2007, several analysts quietly began to circulate the theory of "decoupling," which asserted the global economy was strong enough to weather a downturn in the US economy. In other words, it was expected that the credit crisis would be contained within the US, and the rest of the world would plod along, unaffected. This notion now appears to be completely without merit, except in a few isolated cases.

As the credit crisis has unfolded, the Dollar has remained (relatively) strong, especially considering the deteriorating state of its economy. The reason for this, of course, is that in times of crisis, investors flock to perceived safe havens, such as the US and EU. However, an especially pessimistic series of economic developments has called into question the wiseness of this strategy. A handful of American banks and mortgage institutions have already collapsed, and bankruptcies in all sectors of the economy will surely become more common. The picture in Europe is equally bleak. Several economic indicators have fallen to multi-year lows, and the ECB's decision to hike rates looks increasingly misguided. Given these circumstances, where can investors turn?

Volatility, the perennial enemy of the carry trade, has returned with a vengeance. The US stock market, a proxy for global risk appetite, has fallen significantly (nearly 20%) over the last six months, a trend that has accelerated over the last two weeks. By no coincidence, the Japanese Yen and Swiss Franc have rallied dramatically over the same time period. On one hand, currency trading is seemingly becoming more cut-and-dried, as correlations strengthen between different sectors of the global capital markets and specific currencies. The respective inverse relationships between the Dollar and oil, and between the Yen and US stocks, have been particularly strong of late.

Most of the stories and analysis featured on the Forex Blog concern the Dollar, or at the very least, how other currencies are performing relative to the Dollar. But there are many important currency pairs that don't involve the Greenback, including the Euro/Yen. Last week, the Euro climbed to its highest level in 2008 against the Yen, thanks to diverging economies and interest rates. Neither economy is particularly strong, but the Bank of Japan is using especially bearish language to describe its faltering economy. It should be noted that despite a prolonged period of economic growth, the Bank of Japan avoided raising interest rates even once. Meanwhile, the European Central Bank is becoming increasingly hawkish in its monetary policy rhetoric.

"The credit crisis is over! No it's not! Yes it is!"

Yesterday, the Forex Blog reported that the risk of intervention in forex markets is growing, in order to prop up an ailing Dollar.  The focus of the post was on the Euro, which is hovering below the record high of $1.60 reached last week.

Over the weekend, Bear Stearns, a prestigious American investment bank,
hurriedly scrambled to find a buyer in order to avoid having to file
for bankruptcy. While a buyer (JP Morgan) was ultimately secured,
investors remained jittery, as the collapse of this magnitude is virtually unprecedented.  When forex markets
re-opened on Monday, the Dollar crashed against all of the world's
major currencies, namely the Euro and the Yen. Furthermore, analysts
are now beginning to view forex intervention as increasingly likely. It's