Japanese Yen

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

Most of the world's major currencies are affected by a variety of technical and fundamental factors, such that only taking into account one factor is tantamount to using P/E multiples as the sole basis for purchasing shares of stock.