The US dollar’s recent weakness, fueled by a string of disappointing economic data, has increased speculation about a potential interest rate cut by the Federal Reserve in September. This has pushed the dollar below the 142 yen mark for the first time in 2024, a development that has caught the attention of economist Peter Schiff. Schiff, known for his contrarian views, has raised concerns about the possibility of a yen-carry unwinding, a scenario that could have significant repercussions for global markets.
The yen-carry trade, a popular investment strategy, involves borrowing yen at extremely low interest rates and using the funds to invest in assets denominated in other currencies, where returns are typically higher. However, the recent strengthening of the yen, fueled by the Bank of Japan’s recent interest rate hikes, threatens to unravel this trade.
Schiff points to the next support level for the dollar-yen pair around 128, a 20% drop from the June high. He warns that a significant unwinding of the yen-carry trade could lead to a sell-off in long-term US Treasuries and risk assets, potentially mirroring the global market crash of August 2024, when Japan’s Nikkei 225 index plunged by 12.4%. The sell-off had a ripple effect across global markets, causing the S&P 500 Index to slump by 3%.
While the Fed is moving towards monetary policy normalization, the Bank of Japan continues its ultra-loose monetary policy, creating a divergence in interest rate policies. The Bank of Japan’s recent rate hikes, starting in March 2024, have strengthened the yen, posing a threat to the yen-carry trade.
The situation is closely watched by market analysts as any significant unwinding of the yen-carry trade could have far-reaching consequences for global financial markets, particularly for long-term US Treasuries and risk assets.
