Yen

On the basis of a 25% appreciation against the Dollar, 2008 marked the strongest year for the Japanese Yen since 1972, as the credit crisis caused a rapid unwinding of carry trades as investors abandoned risky positions. 2009 may not be as auspicious for the Yen, however, as a bevy of factors coalesces to halt its upward progress. First of all, global credit and forex markets have begun to stabilize over the last few months. The seemingly unending US government bailout has restored confidence in riskier sectors, such as the automotive sector. Coupled with a cut in Japanese interest rates, investors are being lured back into the carry trade.

In recent periods of Dollar Weakness, all of the major currencies have been quick to capitalize- all but the Japanese Yen.  After a while, it became clear that the Yen was being held down by carry traders, who sold Yen in favor of higher-yielding, more risky currencies.  It was long believed that the only thing that would shake the Yen loose from its moorings was not a Japanese interest rate hike or economic growth, but volatility in capital and forex markets.  Sure enough, the explosion of the credit crisis induced a rapid appreciation in the Yen.  Yesterday, it crashed