Does a Stronger Yen Hurt the US Dollar?

The Yen has risen against all major currencies as investors seek safe havens for their assets. Bloomberg Business comments that while the Yen advances to a 15-month high that part of this picture is an unraveling of the Yen carry trade.

The yen climbed against every major currency as a drop in global stocks and rising tensions between North and South Korea boosted demand for havens.

The Japanese currency’s advance to its strongest level in 15 months left traders speculating that the Bank of Japan may intervene to arrest gains that threaten to undermine almost three years of monetary stimulus.

“Growing geopolitical risks are only likely to fuel more repatriation flows into the yen given that Japanese investors are very invested in Asia. In addition, investors believe that the Bank of Japan is out of policy options.”

Is the appreciation of the Yen as investors seek safe havens an isolated event or does a stronger Yen hurt the US dollar?

A Cheaper Dollar

As the Yen advances it results in a cheaper dollar as regards the Yen but when then Yen climbs versus all currencies it does not have an effect on the USD versus other currencies. Reuters reports that while the U.S. dollar slides versus the Yen so does the Euro.

The U.S. dollar fell to a 15-month low against the yen on Thursday, on track for its worst week against the Japanese currency since 2008, as fears of a global economic slowdown and concerns about stress in the banking system, increased demand for safe-havens.

The yen surged against both the U.S. dollar and euro on speculation about Bank of Japan intervention though, but the BOJ had no comment.

A slump in major stock markets and a jump in bond prices this week has forced traders out of risky positions, leading to the unwinding of the carry trade and repayment of cheap yen funds.

Traders use the yen to fund trades of more risky assets because of its low interest rate. When markets sour and traders become risk averse, they unwind those trades and buy back the currency. Recent global market turmoil has prompted large-scale yen buying even though Japan recently lowered its interest rates below zero, which theoretically should reduce the yen’s value.

Traders no longer fear a series of interest rate increases by the US Federal reserve this year which takes upward pressure off the USD.

Is a Weaker Dollar All That Bad?

The strong US dollar hurts US exports and therefore US industry. A stronger Yen will not hurt the US dollar but rather help it as far as US-Japanese trade goes. U.S. News notes that US industrial production fell for the third straight month in December.

Industrial production, which includes manufacturing, mining and utilities, contracted 0.4 percent after retreating a revised 0.9 percent the previous month, the Federal Reserve reported Friday.

American industry has struggled in recent months even as the overall economy appears solid. The November decline was the biggest drop since May 2009. Output fell 0.2 percent in October and was flat in September; the Fed originally reported that production fell in September.

“Overall, with the dollar still rising at a rapid pace and global demand clearly pretty weak we don’t expect much from the U.S. manufacturing sector this year,” Paul Ashworth, chief U.S. economist at Capital Economics, wrote in a research report. “We still expect the domestic service-based economy to perform well this year.”

In short a little tapering off of the US dollar will probably be a good thing for US industry and the economy.