|
|
The Year of the Yen by Ashraf Laidi 2/8/2005
|
2004 may have been known as the year of the euro. 2005 might as well be the year of the yen, or at least the beginning of the yen’s long awaited bull run. Rationale: Japanese authorities cannot afford stacking their $700+ billion chest of US treasuries when the dollar is expected to shed more of its value after an 18% decline in trade-weighted terms over the past 3 years. A gradual Japanese retreat from US dollar securities into non-dollar assets is inevitable in order to avoid massive losses on the central bank’s US dollar portfolios.
Dollar losses are not only confined to Japan. The European Central Bank is expected to take a loss of at least $1.3 billion on its US dollar holding as a result of the euros appreciation against the US currency. The ECB had already booked a $625 million loss in 2003 due to the falling dollar. The People’s Bank of China has the second biggest armory (after Japan) of foreign exchange reserves at $600 billion in 2004. The NY Federal Reserve estimates that a 10% rise in the Chinese yuan would trigger a drop of about 3% of the nation’s overall GDP. Several central banks have started the adjustment process into euros since 2 years ago. Russia already began shifting its currency within the past two years from 12-15% holdings in euros to 25%. A move to 50%-50% dollar-euro proportion is inevitable.
Japan see no choice but to follow suit. Leading the world in holdings of US treasuries amounting to $715 billion in November, Japan loses $7.2 billion for each yen lost against the US dollar. A drop to 97 yen from 103 would inflict a $43 billion hole in Japan’s portfolio of US assets. That explains the drop in Japanese holdings of US treasuries between September and October of last year--the first month-to-month decline in three years. See chart below:
This article contains the following sections:
Short Dollar/Yen and 1/2 Long Aussie/Yen
You need to be logged in to Forexnews to view the remainder of this article. Please login with your username and password at the top left corner of the site, or Request Free username and password to receive full access.
