Yen carry trade could be short-term -- Dollar could decline

December 28, 2005

Yes, the dollar has been rising all year, but that is a fairly short term effect caused by currency traders who buy a cheap currency, like the yen , and invest it in a stronger currency, like the dollar...which drives the dollar further up. The "yen carry trade", as this is called, may be coming to an end, for three reasons:

1. Credit rating agencies can issue warnings about a country's current account deficit, just like they do with companies. In fact, Standard & Poor just issued a warning on New Zealand's deficit, which is 8% of GDP...not much higher than the U.S. deficit, which is expected to read 6% this year.
2. The dollar has been supported by a Fed Funds rate that are higher than other countries, and by the expectation that the Federal Reserve will continue to support the dollar by raising rates. However, the new expectation is that the Fed will stop raising rates sometime next year...which will allow the dollar to fall.
3. The government is expected to issue a massive amount of debt in Q1 2006 - $171 billion, three times as much as normal. The question is whether foreign governments, who have been buying our debt and supporting a higher dollar, be willing to absorb this much more debt?

What the end of the yen carry trade means: 

Despite short term dollar increases, retirement planning should be about trends over the next 10 - 30 years. This article details the fundamentals which point towards a lower dollar - during that time frame.

Action Steps: 

Don't be fooled by short term dollar increases. Make sure your retirement portfolio includes 30% overseas and emerging markets funds. Find out how to protect your personal finances in the WorldMoneyWatch Special Report, "The Dollar Collapse."

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