The Japanese yen, and to a lesser degree the much maligned euro, have become the safe havens of choice as investors punished the U.S. dollar and abandoned risky emerging market investments.
The Japanese yen hit a seven month high against the dollar on Monday as investors chose to look to developed market currencies while moving out of risky investment areas during the market turmoil at the beginning of the week.
Currency hedging, which has been extremely popular while the dollar was rising against other currencies and expected to continue on an upward trend, has lost its appeal as the currency landscape has suddenly changed.
The yen, which had been steadily losing ground against the dollar, reached a low point in early trading on Monday before taking off as it picked up almost 4% for the day, its largest one day gain since 1998.
Meanwhile, the euro, had lost as much as 13% against the dollar during 2015 on the back of investor belief that the European Central Bank would ease its monetary policy while at the same time betting that the U.S. Federal Reserve would take action, such as an interest hike, which would further strengthen the dollar.
The dollar lost ground against the yen to a large degree as a result of market positioning - a situation where investors have already committed themselves - ahead of the unexpected brutal correction of stocks. The forex market has been short on the yen and euro and long on the dollar. In addition to this, almost $1 trillion has been moved out of developing economies as investors very rapidly opted for the security of a safe haven.
CNBC reports that many analysts believe that in addition to the “safe haven” currency flight, the drop in oil prices has been a booster for European competitiveness and has lifted its currency.
Investors are also viewing the yen and the euro as alternative safe havens to what they perceive to be a weakening dollar, a perception that may become reality if the current turbulence in the currency markets leads the Fed to delay a hike in interest rates. Former Treasury Secretary Larry Summers is one of a number of prominent economic personalities that have called on the Fed to delay the expected hike in rates.
Ray Dalio, a hedge fund expert of Bridgewater Associates, said on Tuesday that he thinks the next Fed move may be more easing, rather than the expected tightening, according to a CNBC report.
Michael Pento of Pento Portfolio Strategies also voiced the opinion that the Fed won’t raise rates, but will ultimately have to ease its policy and begin another round of quantitative easing, which would of course weaken the dollar further.
MT4 Chart: USD/JPY