Increased hostilities may threaten yen-funded carry trades as investors turn to the Japanese currency for safety.
The greenback held near a one-week high as risk sentiment remained fragile, pinning the euro close to its one-week low from Friday.
Carry trades funded by the yen could be the biggest casualty of further escalation in the war, analysts said, as global investors who have for months been shorting the yen to invest in higher-yielding currencies buy it back as a safe-haven.The Japanese currency, which is near to potential intervention levels around 150, could also rally if the Fed has to stop hiking rates even as the Bank of Japan feels compelled by domestic inflation to tighten policy.
“The largest overhang I can see in this regard is dollar-yen, where the BOJ must pivot regardless and the carry trade that has built up now amounts to nearly half a trillion dollars.” “I don’t see it altering growth trajectories of the major economies nor does it make the Fed more hawkish. If anything, I think the Fed is less inclined to tighten going forward given the perception of heightened risks.”
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