Overnight, Japan's central bank entered FX markets and bought the dollar. The yen has been very strong against the dollar. It is, in fact, trading at a 15 year high relative to the dollar.
What must not be overlooked, however, is that this is not simply a yen-dollar phenomenon. The dollar yesterday traded at par versus the Swiss franc and the euro is back up to $1.30.
This is a huge flight from the dollar. FT even notes that bunds were up while the Euro strengthened--an unusual occurrence.
Generally, euro strength would result in less demand for bunds. That they are both headed up at the same time would suggest that the dollar weakness is the primary mover in the markets right now.
It is unclear what is behind this flight from the dollar. Mainstream media and the financial media do not yet seem to be aware of it. Their stories tend to be focused on the BOJ's intervention more than the bigger picture. But something big may developing here.
The dollar weakness appears to be strongest against the yen and Swiss franc, so we possibly have more unwinds of past carry trade activity, but the undertow feels very strong. Stay tuned.
Japan Monetary Source says Japan has been intervening constantly in FX mkt during NY trading hours
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1 Comments in Response to The Broader Meaning of Japan's Intervention to Prop Up the Dollar
So I guess the point is we don't know the broader meaning. Leaving room for pure speculation. Well we got China and Japan both intervening, both trying to prop up their export markets by weakening their currencies. So that much makes sense.
And these happen to be the two countries holding onto most of our debt. So if there really is a flight away from USD (which we've speculated could happen by almost any external event from storms to wars to another terrorist attack on US soil), the last thing China and Japan would want is a full on stampede because that would pretty much signal sovereign default OR hyperinflation. Either of which render their holdings of US debt worthless almost overnight.
Heck man, all it will really take is a RUMOR. Like the rumors that China and others are already dumping USD as fast as they can and buying gold with the money.
Continuing, early reports indicate that these actions (on the part of Japan) were done in coordination with their USA counterparts.
OH, REAAAAAAAAAALY? DO TELL US MORE! Do Messers Geitner and Bernanke have any comment? Nope. They are keeping mum about this deal.
I guess it's an important point as engaging in currency manipulation with agencies of foreign governments might just be outside the Fed's charter. Hey, it's might even be against some law or another. I'd want to shut up about it if I were them too.