Financial markets have been swept up during the last nine months by the Fed's easy money policies, particularly its zero-interest-rate policy, which fostered a carry-trade in the dollar. Now, as the dollar rallies, and the Japanese economy and yen falter, the short term appointment of the dollar as the primary funding currency may be ending. Some say that it will be dire for markets. Perhaps the best news right now for the US and Canada is the bad news from Japan, of record deflation, and the BoJ's need to devalue the yen. There's a good chance the yen will replace dollar, and resume its decade-plus-long position as the world's primary funding currency, and that's good news for the market in the longer term. In the near-term transition period, however, markets will be volatile, as one carry unwinds, and the other re-winds.
Read more here: Carry Trades Make and Break Markets, GlobeAdvisor.com, December 21, 2009
