Japanese yen dominance challenged in global carry trades

The landscape of global carry trade operations is shifting as the Japanese yen loses its long-standing dominance as a primary funding currency. Following a sharp depreciation of the yen, interventions by authorities in both Japan and the United States have forced investors to reassess currency risks associated with borrowing in low-interest yen to invest in higher-yielding assets.

Strategists at ING suggest that the Swiss franc may emerge as a preferred alternative for carry trades. This potential shift is driven by Switzerland’s low-interest-rate environment and the heightened risk of further market interventions in the yen market.

In a carry trade, investors borrow in a low-interest currency to fund positions in assets like US bonds, technology stocks, or commodities. However, the recent volatility and the possibility of central bank intervention mean that a sudden appreciation of the borrowed currency can erase investment gains or result in significant losses, making the yen a riskier funding tool than in previous years.