Yen looks golden as investors cut risk

The Japanese yen suddenly is the strongman of global money.

The yen rocketed against the dollar, the euro and other currencies Thursday amid an unwinding of the so-called carry trade -- investors’ use of low-cost loans in Japan to fund purchases of investments worldwide.

The carry trade has been a favorite strategy of hedge funds and other big-money players for years. But the turmoil in global markets in recent weeks has triggered a rush by many investors to lower the risk in their portfolios -- particularly by reducing debt.

“This is about the withdrawal of easy money,” said Xinyi Lu, chief strategist of the international treasury division at Mizuho Corporate Bank in Tokyo.

In some cases investors have been forced to dump certain assets to make up for losses elsewhere in their portfolios.

As investors sell assets they’ve purchased with Japanese money, they have to convert the proceeds to yen to pay off their loans. That drives up the value of the yen.

The dollar plunged to 113.11 yen Thursday from 116.92 on Wednesday. The U.S. currency has tumbled from 122 yen at the beginning of July.

But the dollar has been strengthening in recent days against many other currencies, including the euro, the Australian dollar and the British pound. The pound fell to $1.98 on Thursday from $1.99 a day earlier. It was worth $2.06 in late July.

Despite the threat of a worsening credit crunch in the U.S. economy, the dollar is playing its usual role as a relative haven in times of global financial upheaval, analysts say.