Currency Anomalies and Commodity Boom: Rise and Fall of Currencies: Economistan

Currency markets have had a rough year for the past twelve months where all the major currencies have declined with respect to the US dollar. Chinese Yuan is the only exception amongst major currencies. The reason for the appreciation for the Chinese currency is the strength of its export related economy and the record trade surplus it is still posting with its main export market. i.e. the US. The Chinese reserves have hit more than $2 trillion, which would also help the Chinese currency retain its strong position in the world markets.

The Japanese currency’s (Yen) rise and fall over the past twelve months vis-a-vis the US dollar is somewhat of an anomaly. However, this anomaly can be attributed to the carry trades where the low yielding Yen has played a major role, resulting in the strengthening of the Yen in the calendar year 2008. The declining stock markets had been aiding the rise of the Japanese currency due to the carry trades. This mechanism however, came to an end since the beginning of the current year with the Japanese currency falling out of favor due to carry trade cycle completion and the deterioration of the ailing export led Japanese economy. Yen has fallen by around 9% against the dollar just this month alone. It remains to be seen, how the Japanese companies react to the weaker Yen and whether the weakening currency would eventually make Japanese exports more competitive in the world market than they have been lately due to the strong currency.......

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