The Japanese yen (JPY) has seen a notable surge against the U.S. dollar (USD), outperforming other major currencies in a market environment marked by volatility similar to early August’s sharp global stock market declines and Bitcoin (BTC) drops. Since late Thursday, the yen has strengthened by 2.4%, rising to 145 per dollar, reversing its earlier downtrend from the August 5 low of 141.68. This shift suggests a renewed preference for the yen as a safe-haven or “anti-risk” currency.
The yen’s appreciation isn’t limited to the dollar; it has also gained over 1% against the Australian dollar, a key barometer of market risk appetite. Its performance against the euro and British pound has been even stronger, indicating a broader trend of yen strength amid global financial instability.
This recent yen rally mirrors its performance in late July and early August, when a surge in the currency led to the unwinding of carry trades—investments funded by low-interest yen loans, which are often used to invest in higher-yielding assets. The unwinding of these trades has reduced risk exposure across traditional markets, negatively impacting cryptocurrencies like Bitcoin. For instance, Bitcoin dropped from about $70,000 to $50,000 in the eight days leading up to August 5, before rebounding alongside the recovery in USD/JPY.
Trader Simon Ree noted that the yen’s strength is creating a “negative feedback loop,” as stop-loss orders are triggered and overstretched carry positions are unwound, unsettling global risk asset positions. Andrei Kazantsev, head of Goldman Sachs’ crypto-linked trading desk, agreed, noting that Bitcoin and Ethereum were caught in the unwind of yen carry trades and the broader global market shock on August 5. The sudden market movements, reflecting a spike in Value at Risk (VAR), have prompted traders to reduce their exposure to riskier assets.
The yen’s recent rise from 161 to 141.68 per dollar has led to increased interest in buying the yen during dips, according to ING analysts. They suggest that a significant drop in USD/JPY could shift market expectations, increasing the likelihood of further yen appreciation.
However, analysts warn that the unwinding of carry trades could resume in the coming weeks, driven by developments in the U.S. economy and the upcoming Federal Open Market Committee (FOMC) meeting in mid-September. Arnim Holzer, global macro strategist at Easterly EAB Risk Solutions, pointed out that while current Fed funds futures indicate a 50% chance of a 50-basis-point rate hike in September, these odds may decrease as the meeting approaches due to generally stable economic data.
Holzer added that if the Fed were to cut rates by 50 basis points, the initial market reaction might be positive, but concerns about the economy and yen strength could trigger renewed unwinding of carry trades.
