Yen at Risk

The yen slumped past the key psychological level of 140 per dollar for the first time in almost a quarter of a century, a move that may extend as the divergence between the US and Japanese monetary policy widens.

Causes: The worst performer this year among Group-of-10 currencies -- reflects a growing split between the Bank of Japan, which is keeping policy loose to bolster the economy, and a Federal Reserve that has been at pains to stress its inflation-fighting bona fides. 

Effects: Fueled in large part by the rise in Treasury yields, the yen fell as much as 0.9% against the dollar Thursday, extending its year-to-date decline to almost 18%. And options markets show traders are betting there might be more to come, with pricing skewed toward contracts that will pay off if the dollar-yen keeps rising.

The resulting widening yield gap between the US and Japan has been a big driver of yen weakness, as it encourages investors to seek out the more attractive returns in dollar assets from money market instruments to fixed-income securities compared to Japanese ones.



What's in it for you : The yen weakness is being driven by an artificially low-interest rate compared to everyone else, and there’s the question of how far can it really go.

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