HONG KONG -
The U.S. dollar briefly fell below 100 yen on Thursday in Asia, the first time it had dropped past the psychologically important mark since November 1995.
The dollar slid to 99.75 yen in late afternoon trading in Tokyo, before rebounding to 100.18 yen.
Interest rate cuts in Washington have prompted more speculators to begin unwinding their yen carry trade investments in dollar-based securities, which have become less profitable measured against risk and opportunity costs. As a consequence, the greenback showed softness in Asia on Thursday. At one point in the morning session in Tokyo, it inched down to around 100.01 yen, a level unseen in 12 years and five months, down from 101.66 yen in New York late Wednesday. It then probed still deeper lows later in the day.
In a research note published Thursday, Citigroup analysts said they expected the U.S dollar to drop further against the yen, with more unwinding ahead, "for 9 months into a financial crisis that has witnessed a dramatic pick-up in volatility, the Japanese banking sector appears to have remained broadly short Yen. … the overall position of households also remains broadly undiminished, despite a reduction in margin account trading, implying ample room for carry trade unwinds and capital repatriation."
Thomson Financial also forecast that the yen carry trade would subside, as short-term interest rate differentials between the United States and Japan have now tightened to 220 basis points, down from 495 basis points in 2006, making the practice less attractive. The yen has strengthened by 12.7% against the U.S. dollar since July of last year, which entails less likelihood that speculators will gain from the carry trade.
"The continuing flow of weak economic data from the US leading to weakening sentiment, rising fear of a recession and the fall in liquidity is expected to keep everyone on tenterhooks with a rather guarded approach to riskier investments," Thomson Financial said in a report.
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