TOKYO, February 6: A climb in Japanese money market interest rates that forced overseas hedge funds to buy back the yen was a key behind-the-scenes factor boosting the Japanese unit's recent revival against the dollar, dealers said on Friday.The most obvious cause of the dollar's decline was the growing belief that Japan will come up with extensive measures to boost its economy, but many dealers said the fall was hastened by hedge fund-led unwinding of "yen carry trades" involving currency and interest rate swaps.
"It's the consensus that (stimulus package) speculation was the major driving force that hammered down the dollar -- but behind that the hedge funds were unwinding their (yen carry trade) positions," a senior Japanese city bank dealer said. "The hedge funds have been seen as active sellers recently, and I think such position unwindings were behind the dollar's fall," the dealer said. "Such short-covering of the yen may have spurred the speed of the dollar's downtrend, but I don't think theyhave unwound their positions totally," he said.
"That means that they could still buy the yen depending on the future development (of the interest rate and the fate of the Japanese package)." The dollar has fallen nearly nine per cent since hitting a high of 134.45 yen early in January. It fell as low as 122.80 yen on Thursday in New York. In yen carry trades, fund operators borrow low-cost yen funds and convert them into dollars through currency and interest rate swaps.
Fund operators are said to have been involved in such trades since late 1995, raising cheap yen funds to invest in high-yielding currencies such as the dollar. But a recent rise in Japanese interest rates has made it harder to borrow the yen cheaply, forcing the funds to change tack and buy back the yen against the dollar.
One currency strategist said the hedge funds that made the yen carry trades had mostly finished unwinding their yen short positions, which he estimated had totalled an estimated $40-50 billion in early January whenthe dollar hit 134.45 yen. But Noriyuki Mizukami, head of the treasury sales section at National Westminster Bank and senior dealers, said some yen short positions remained uncovered as hedge funds waited to judge Japan's planned economic stimulus steps.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
