Currency Swings Reverse Course

Japan's Nikkei fell yesterday, and the yen dropped 5.25 percent against the U.S. dollar.
Japan's Nikkei fell yesterday, and the yen dropped 5.25 percent against the U.S. dollar. (By Kiyoshi Ota -- Getty Images)
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By Neil Irwin
Washington Post Staff Writer
Wednesday, October 29, 2008

The world's currencies experienced another wave of almost unprecedented volatility, reversing some of the dramatic shifts of recent days.

The Japanese yen fell 5.25 percent against the dollar, its biggest one-day swing since 1974. But its value is still up 12 percent this year. The yen has moved more than 1 percent against the dollar 10 times this month. In October 2007, it didn't move that much even once.

Other big moves yesterday were seen in some of the very nations whose currencies have plummeted in recent weeks, especially mid-size developing countries. The Brazilian real rose 4 percent vs. the dollar, and there were similarly sharp rises in the currencies of Mexico, South Korea, Poland, South Africa, Turkey and Hungary.

The swings in currency markets are moving in tandem with global investors' broad views of risk. On days when fears deepen about a global recession, investors run to safe assets: Stock prices fall worldwide, and prices for safe U.S. Treasury bonds rise. At the same time, the currencies of risky developing countries fall while those of steadier, if still troubled, countries like the United States and Japan rise.

"It's almost like all risky assets around the world are moving in tandem," said Alan Ruskin, chief international currency strategist at RBS Greenwich Capital.

Yesterday, all those trends were operating in reverse as global stocks soared on improved confidence that the world's governments were moving aggressively to contain the financial crisis.

"Today was about the general feeling of optimism in the market overall," said Bernard Baumohl, chief global economist at the Economic Outlook Group, a consulting firm. "Maybe the economy in the U.S. will begin to bounce back next year, there won't be a prolonged recession or a depression. And that would have very positive implications for key emerging markets like Brazil, India and South Korea."

There were more specific reasons for some of the fluctuations. A news report that the Bank of Japan might cut rates in the near future was a factor in driving down the yen.

The rapid appreciation of the yen has been caused by a flight to safety by global investors and the unwinding of the carry trade, an investment strategy that relies on interest rate differentials between nations. But the rapid climb could hurt Japanese exporters, drive the country's economy into a deep recession and destabilize its relationships with trading partners.

For that reason, finance ministers of seven major industrialized nations put out a joint statement Sunday night saying they were concerned about "excessive volatility" in the yen, which was widely interpreted as a hint that the governments might intervene to drive down that currency if conditions worsened.

Meanwhile, developing nations have seen funds flow away from them as investors seek safety. To try to protect the economies, the International Monetary Fund is planning to launch an emergency program to rush currency to nations at risk of burning through their dollar reserves.

The huge fluctuations can make it hard for ordinary economic activities to occur. Businesses, for example, may have a hard time deciding whether to make new investments in a given nation if the value of its currency is swinging wildly. And it makes it harder for policymakers to decide whether to raise or lower interest rates or spend currency reserves when currencies fluctuate so much day to day.

"Today, risk appetites were back on again," said Ruskin. "But tomorrow, they could be off again and everything could swing back the other direction."

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