> The yen is at a 34-year low against the U.S. dollar
I live in Japan and this has happened so quickly it's been stunning. While not much has changed domestically so far, I am hearing and starting to see foreign people question whether they could work and live here long term if it stays like this. It's fine if you are earning USD and visiting Japan (wow there are so many tourists this year) but if your salary is priced in JPY and you plan to retire in the US, it's basically impossible right now.
My understanding is that most of the pain in JPY is being caused by carry trades by the financial sector. Because they are very common currencies and most traders right now believe that both the US and JP are stuck with a wide spread in interest rates... you can borrow JPY and invest in USD and make 4-5% on it.
As an aside, I also wish we didn't use the terms strong/weak for currencies because it carries a good/bad connotation. It's just high/low and there are pros/cons to each.
The other side to this is that after decades of zero to negative inflation (deflation), prices in Japan are finally starting to go up. My personal economic barometer, the Yoshinoya nami gyuudon beef bowl that was 280 yen from the 1990s straight through to the mid-2010s, is up to 448 yen at last check. Not by coincidence, their primary ingredient is imported beef.
Japanese salaries, however, are by and large not going up (certainly not at the same rate), which is obviously causing even more pain and further dividing the haves from the have-nots.
I have a similar concern as an American living in Europe for the last ten years. It was OK-ish when I could work remote and price myself in USD but given the softness in the software job market and the very weak Euro (combined with very low pay in Europe in general) it does make it harder to consider ever being able to move back.
> is being caused by carry trades by the financial sector.
This is a solid short-term explanation, but there's always an investment sector focused on the long term, and those guys are looking at the demographic disaster Japan will inevitably experience.
Carry trades and yield arbitrage explain a lot, but the Hikikomori are wrecking the Yen over the long term.
So quickly so, that I was considering buying a new PC costing about 450,000yen, now it's over 500,000 and I'm putting it off. (For comparison I could get this for approx 3k USD).
A spread on interest rates means you can e.g. borrow some JPY at 2% interest, spend it to purchase USD, then loan the USD to someone else at 6% interest.
After you pay back the 2% interest to the original lender, you're left with 4% as profit.
This usually happens when one government pushes banks for lower interest rates (to stimulate the domestic economy).
It creates a large volume of trades buying USD with JPY, and by doing so causes the JPY currency to become less valuable relative to USD.
It’s not a risk-free trade. Borrowing yen and buying dollars is effectively shorting the yen (relative to the US dollar). The investors who did this before made money because the yen dropped, but maybe they will want to take profits, which would tend to strengthen the yen.
Borrowing yen now to buy dollars is sort of like shorting a stock when the price already dropped. The interest rate difference makes it a cheaper bet, but it’s still a bet and could go bad if the yen strengthens.
As a retail investor, you can do Forex trading or you could do time deposits at a Japanese bank (assuming you live here). SMBC Prestia is offering 6.5% on it right now for example:
I've tried subscribing to NYTimes couple of times (it is super-cheap, here in India) just to get rid of these irritations but I never succeeded -- error with the payment processors.
US printing is not the same as everyone else printing. Almost all trade deals worldwide are done in USD. Everyone except the US must export goods and services (i.e. actually work) to acquire the dollars which will finance their imports; US can just print.
Goods and services that are traded internationally are priced in USD. Other currencies do not end up directly representing goods and services; they are relative to the USD. Therefore, the demand for dollars is always very high, and it will be as long as the dollar keeps the reserve currency status.
Goods and services traded internationally are priced in whatever the parties want.
Ultimately they want to exchange for the currencies they need to pay bills, wages, and taxes in.
"Reserve" currency has little to do with it - if anything it's the high volume of trade with USA that makes it worthwhile to keep reserves of USD, because the high volume of US trade means you get many chances to exchange USD for whatever currency you actually need.
You should read "the global minotaur" by yanis varoufakis. It explains exactly why this is the case. This is true only for the US and it is because other countries buy dollars in bulk to keep the dollar high because:
1) not keeping the dollar high will devalue their dollar reserves.
2) they need large reserves of dollars to be able to facilitate trade in dollar denominated resources like oil.
3) they buy us treasury bonds because this will raise the value of their dollars and because it ks historically a safe investment.
That's the key IMO. USA has a long history of being a safe country for investment. It has uninterrupted democracy and rule of law since it was founded. It hasn't had a war on it's territory since the Civil War. It has a lot of free land and natural resources.
It's just good fundamentals first - and then of course you need not to fuck up massively to ruin that, which USA has not.
Maybe its all relative (i.e., versus what other central banks have done in response to the same shocks).
In any case the post-pandemic interest rate hikes are recent. There seems to be a much longer term (decades long) dollar strengthening pattern that is not really touched upon in the article.
They're somewhat unrelated, because while there's more dollars, the domestic demand for those dollars is also higher now, for lots of reasons. Inflation, the high amount of American debt (which must be paid in dollars), the looming threat of a recession, which entices Americans to save (and they'd prefer to save in dollars and not some other currency).
It says a lot more about the preferences of Americans that it does about any of the other countries.
> You wouldn't think that printing money leads to a stronger currency
Money isn't a commodity, and that's why the Monetarist view is so off.
Inflation is never caused by a decline in the value of money, but it can cause a decline in the value of money, just not in every conditions (and with central banks raising interest rates when there's inflation, in practice it has the opposite effect)
Also strange that this effect is to the point that the dollar gets stronger as the yen gets weaker, even though inflation in Japan has been weak and strong in the US. So the dollar's buying power weakened domestically even as it strengthened internationally.
The relative value of different currencies is not at all related to "how much is printed". Heck, even internally the actual value of money is unrelated to how much is printed.
Main drivers of exchange rates are international trade of all kinds and its requirement to use specific currencies in specific places (you can accept payment in JPY when your company is in USA, but you need to pay your taxes in USD!), and speculation.
Essentially for FOREX, the exchange rate is essentially determined by entities needing specific currency for something - for example to pay for purchases or services, pay wages, taxes, etc. - when you have money in different currency.
The rest is plain market - you put an offer like "I will buy 100k USD in exchange for 11m JPY", but others were willing to offer more, and thus the averaged (I know, simplification) exchange rate goes up.
But you might be able to catch a trade at lower price because someone might need JPY right now (or other forex-compatible asset you have) quicker than it could sell USD at higher prices, etc.
You can of course also purely speculate on the prices and make money from "nothing", pure financialization, pure capitalism, close to zero value being produced.
Printing money can be used to artificially change the exchange rate by offering "cheap" money for other currencies. The reason why you might want to do is simple - your currency being "weaker" tends to benefit exports (at the same time exports drive currency "stronger"), while stronger currency benefits imports (but imports drive currency "weaker")
For all the drama in US Politics, you have to admit they run extremely well economically. Quick to keep rates high, good forecasting, good trade policies, good energy policies.
Europe is like a kid copying the US homework, trying to make the equations work.
Well, compared to most other countries I know about, US rates work a little differently.
Homeowner mortgages are (AFAICT) almost all fixed for the full term of the loan. So a rate hike doesn't immediately take money out of the pockets of a large proportion of the population. It may slow new home finance agreements, and affect a lot of other credit agreements, including the ability of business to borrow, but it doesn't kick a huge number of people right in the domicile.
Whereas here in Aus and in the UK (two places I've held mortgages) fixed terms are only available on a relatively short basis (1-5 years) and people won't take them out at all if they feel the rates are already a little elevated (like now), as there are penalties for refinancing in the fixed period. So interest rate rises directly impact people's pockets and threaten their housing stability.
So over here mortgage holders really do hate rate rises and feel personally aggrieved when the central bank raises them.
This situation conceivably makes tackling inflation easier - public spending plummets when rates go up - but it is massively unpopular.
The FED has done an amazing job and are utterly filled with the smartest people in the field. I love watching the q&a with members as they give such detailed and informative answers on just about everything. Worth watching if you are an econ nerd.
The Federal Reserve (The Fed) is supposed to work independently of the political process which is why we have the same Fed Chair as we did during the Trump years. Ironically this means the Fed Chair keeping rates high is the same one that set a zero base rate. The various Fed leaders operate under the same guise of serving outside the political cycles.
They’re still human so they can be swayed by Presidents and obviously have their own political leanings. In general the ability to not listen to politics allows them to make choices that are inconvenient for an election cycle but good for the US economy.
FYI, Trump has vowed to purge the executive branch of unloyal employees, aiming for unitary rule during his 2nd term. It’s unclear how much of this his conservative SC majority will allow, but…the norm of stable, institutional independence might be gone soon.
I think the main reasons of the strong USD are:
- it's status as world reserve currency
- it's seen as a safe heaven
- The US is still the most profitable market to launch new product
- the US job market is still performing well compared to the battered economies of Europe where unemployment is starting to go back up
If the ECB decides to lower interest rates before the US Fed does, then even more capital will flow in the US because why would you accept a lower interest rate when you can get a better one in the US in the same asset class.
That in turn will keep making the USD stronger than the euro.
Weirdly, there is also a premium on US multinationals.
When you compare dividends+buybacks from UK/French/German companies to US companies, expected returns over 10years, and stock price, excluding "growth" companies (Tesla, netflix, Uber), you can see a 10 to 20% premium. Is it stability priced in?
If given choice to invest in a US company or an EU company, all things being equal, I'd pick US any day of the week. 10% to 20% premium seems kinda low in fact.
I still don’t get why anyone would invest in a regime like the US or China. Europe will show its glory again; no matter what. We will get back what was stolen.
What US "regime"? Have I missed something? Is Trump already a president for life?
> Europe will show its glory again; no matter what.
Unless Europe finds a way to monetise retired people, lack of natural resources and free land and the grip of bureaucracy and old money I find it highly unlikely
This is one of those instances where technical language is misleading. The US dollar is indeed "strong", but it still buys less stuff than it did last year. The gold price is not impressed by this sort of strength. The news is interesting more as commentary on relative policy positions of central banks around monetary supply and how much of that is leaking into international trade.
On that topic; I've been watching the US Treasury's "Major Foreign Holders of Treasury Securities" [0] with some interest. There are some very big strategic changes afoot; China doesn't seem particularly willing to take US debt any more. They'd going to be 3rd largest holder soon and now hold less than 10% of the outstanding US treasury debt.
Unless you're in the habit of taking daily holidays that is practically untrue. The US dollar has been dropping in value at a rate of ~5% per annum for the last few years. And have an official policy of dropping ~2% per annum.
So even if it strengthens 10% against the Yen then that just means that someone in Japan will be feeling really poor, but a US dollar still won't be buying as much as a US dollar from a few years ago would have once inflation in both currencies gets factored in. The purchasing power of all the currencies is dropping, it is just the Yen is dropping faster. These are policy choices by the respective governments (although they often don't feel like choices).
I'm sure there are a bunch of currency traders making good money and it is certainly possible that US dollars buy more in some places. But it is more likely that a US dollar in 2024 buys less than in 2023 everywhere, because the US government has an official policy of making it so. Over 5 year timelines it is all but a guarantee that they will succeed in their policy. There isn't a global trend where the US dollar buys more than it did some time in the past; it is strengthening against other currencies, not rising in value.
The rest of the world also printed a lot of money. In a globalized economy inflation does remain isolated in the country that it originates in. Especially when the country has a lot of exports.
Normally the exchange rate divergence could be countered by increasing interest rates in the country with the weakening currency. But today it appears most countries are not willing to do this to the extent necessary.
Readit News
I live in Japan and this has happened so quickly it's been stunning. While not much has changed domestically so far, I am hearing and starting to see foreign people question whether they could work and live here long term if it stays like this. It's fine if you are earning USD and visiting Japan (wow there are so many tourists this year) but if your salary is priced in JPY and you plan to retire in the US, it's basically impossible right now.
My understanding is that most of the pain in JPY is being caused by carry trades by the financial sector. Because they are very common currencies and most traders right now believe that both the US and JP are stuck with a wide spread in interest rates... you can borrow JPY and invest in USD and make 4-5% on it.
As an aside, I also wish we didn't use the terms strong/weak for currencies because it carries a good/bad connotation. It's just high/low and there are pros/cons to each.
Japanese salaries, however, are by and large not going up (certainly not at the same rate), which is obviously causing even more pain and further dividing the haves from the have-nots.
This is a solid short-term explanation, but there's always an investment sector focused on the long term, and those guys are looking at the demographic disaster Japan will inevitably experience.
Carry trades and yield arbitrage explain a lot, but the Hikikomori are wrecking the Yen over the long term.
I have JPY, can I make money on it, or do I need to borrow it? Is the idea here to buy USD, wait for the price to go up, and then sell it back in JPY?
After you pay back the 2% interest to the original lender, you're left with 4% as profit.
This usually happens when one government pushes banks for lower interest rates (to stimulate the domestic economy).
It creates a large volume of trades buying USD with JPY, and by doing so causes the JPY currency to become less valuable relative to USD.
Borrowing yen now to buy dollars is sort of like shorting a stock when the price already dropped. The interest rate difference makes it a cheaper bet, but it’s still a bet and could go bad if the yen strengthens.
https://www.smbctb.co.jp/en/timedeposit2404/?icid=24_en_top_...
https://web.archive.org/web/20240430191512/https://www.nytim...
You wouldn't think that printing money leads to a stronger currency, but perhaps this is a delayed effect after you stop printing.
Goods and services that are traded internationally are priced in USD. Other currencies do not end up directly representing goods and services; they are relative to the USD. Therefore, the demand for dollars is always very high, and it will be as long as the dollar keeps the reserve currency status.
Ultimately they want to exchange for the currencies they need to pay bills, wages, and taxes in.
"Reserve" currency has little to do with it - if anything it's the high volume of trade with USA that makes it worthwhile to keep reserves of USD, because the high volume of US trade means you get many chances to exchange USD for whatever currency you actually need.
That's the key IMO. USA has a long history of being a safe country for investment. It has uninterrupted democracy and rule of law since it was founded. It hasn't had a war on it's territory since the Civil War. It has a lot of free land and natural resources.
It's just good fundamentals first - and then of course you need not to fuck up massively to ruin that, which USA has not.
In any case the post-pandemic interest rate hikes are recent. There seems to be a much longer term (decades long) dollar strengthening pattern that is not really touched upon in the article.
It says a lot more about the preferences of Americans that it does about any of the other countries.
Money isn't a commodity, and that's why the Monetarist view is so off.
Inflation is never caused by a decline in the value of money, but it can cause a decline in the value of money, just not in every conditions (and with central banks raising interest rates when there's inflation, in practice it has the opposite effect)
Deleted Comment
Main drivers of exchange rates are international trade of all kinds and its requirement to use specific currencies in specific places (you can accept payment in JPY when your company is in USA, but you need to pay your taxes in USD!), and speculation.
Essentially for FOREX, the exchange rate is essentially determined by entities needing specific currency for something - for example to pay for purchases or services, pay wages, taxes, etc. - when you have money in different currency.
The rest is plain market - you put an offer like "I will buy 100k USD in exchange for 11m JPY", but others were willing to offer more, and thus the averaged (I know, simplification) exchange rate goes up.
But you might be able to catch a trade at lower price because someone might need JPY right now (or other forex-compatible asset you have) quicker than it could sell USD at higher prices, etc.
You can of course also purely speculate on the prices and make money from "nothing", pure financialization, pure capitalism, close to zero value being produced.
Printing money can be used to artificially change the exchange rate by offering "cheap" money for other currencies. The reason why you might want to do is simple - your currency being "weaker" tends to benefit exports (at the same time exports drive currency "stronger"), while stronger currency benefits imports (but imports drive currency "weaker")
Europe is like a kid copying the US homework, trying to make the equations work.
Well, compared to most other countries I know about, US rates work a little differently.
Homeowner mortgages are (AFAICT) almost all fixed for the full term of the loan. So a rate hike doesn't immediately take money out of the pockets of a large proportion of the population. It may slow new home finance agreements, and affect a lot of other credit agreements, including the ability of business to borrow, but it doesn't kick a huge number of people right in the domicile.
Whereas here in Aus and in the UK (two places I've held mortgages) fixed terms are only available on a relatively short basis (1-5 years) and people won't take them out at all if they feel the rates are already a little elevated (like now), as there are penalties for refinancing in the fixed period. So interest rate rises directly impact people's pockets and threaten their housing stability.
So over here mortgage holders really do hate rate rises and feel personally aggrieved when the central bank raises them.
This situation conceivably makes tackling inflation easier - public spending plummets when rates go up - but it is massively unpopular.
You can be sure that the day the USD isn't viewed as the global currency, all this printing will come bite back hard and probably cause a collapse.
Maybe China will have strong consumers in the future but then it'll have to ensure it can compete with US wages which erodes its competitiveness.
House always wins.
They’re still human so they can be swayed by Presidents and obviously have their own political leanings. In general the ability to not listen to politics allows them to make choices that are inconvenient for an election cycle but good for the US economy.
If the ECB decides to lower interest rates before the US Fed does, then even more capital will flow in the US because why would you accept a lower interest rate when you can get a better one in the US in the same asset class.
That in turn will keep making the USD stronger than the euro.
When you compare dividends+buybacks from UK/French/German companies to US companies, expected returns over 10years, and stock price, excluding "growth" companies (Tesla, netflix, Uber), you can see a 10 to 20% premium. Is it stability priced in?
> Europe will show its glory again; no matter what.
Unless Europe finds a way to monetise retired people, lack of natural resources and free land and the grip of bureaucracy and old money I find it highly unlikely
On that topic; I've been watching the US Treasury's "Major Foreign Holders of Treasury Securities" [0] with some interest. There are some very big strategic changes afoot; China doesn't seem particularly willing to take US debt any more. They'd going to be 3rd largest holder soon and now hold less than 10% of the outstanding US treasury debt.
[0] https://ticdata.treasury.gov/resource-center/data-chart-cent...
"...Americans can afford to buy more foreign goods and services (including cheaper vacations).
So even if it strengthens 10% against the Yen then that just means that someone in Japan will be feeling really poor, but a US dollar still won't be buying as much as a US dollar from a few years ago would have once inflation in both currencies gets factored in. The purchasing power of all the currencies is dropping, it is just the Yen is dropping faster. These are policy choices by the respective governments (although they often don't feel like choices).
I'm sure there are a bunch of currency traders making good money and it is certainly possible that US dollars buy more in some places. But it is more likely that a US dollar in 2024 buys less than in 2023 everywhere, because the US government has an official policy of making it so. Over 5 year timelines it is all but a guarantee that they will succeed in their policy. There isn't a global trend where the US dollar buys more than it did some time in the past; it is strengthening against other currencies, not rising in value.
When that happens, oh boy, that's going to be so much money flowing from China to US that it's going to make the dollar even stronger
Normally the exchange rate divergence could be countered by increasing interest rates in the country with the weakening currency. But today it appears most countries are not willing to do this to the extent necessary.