where to wednesday, page-99

The carry trade I don't completely understand, and maybe someone else can help this. Simply, it is the cheapest of all accessible currencies to borrow based on (sustained) domestic interest rate repayments.

If you can borrow money at an ultra low interest rate, and invest in something with high interst rate of earnings (anywhere, anything) - then you will.

Usually, domestic deposit interest is 2-3% lower than loan repayment interest (so it never works to use your own currency) - but invest in someone else with higher interest earnings, and low risk - hence the carry trade.

Historically, I understand Japan has been the carry trade, because of their unique conditions (landlocked, resource limited, value adding, high raw imports, high processed exports). Very little fluctuation by tightly controlled internals - but heavily dependent on external consumption.

With the US as carry trade, Japan gets a double whammy by losing out on interest income earned from VERY LARGE investment borrowings, if this is in fact what is happening. I'd imagine Nikkei financials to be down as much as a reduction in industrial export earnings that is causing difficulties - but haven't looked into this.

Domestic problems in Japan brought on because the Yen is floated against the USD (as for all other floated currencies), but the domestic effects are markedly different between countries (you only have to look at Australia for this example). The Chinese and Asia countries are not in this position - they are fixed (pegged) to the USD.

Bretton Woods system of fixed exchange rates collapsed in 1971 (well, didn't collapse, the US pulled the pin), and many exchange rates 'floated' in values. 1971 is when the JPYen started to float.

rgds,
pw