Monday, October 27, 2008

G7 Disses Climb In Yen

Below is a statement issued by the G7 Finance Ministers and Central Bank Governors:

We reaffirm our shared interest in a strong and stable international financial system. We are concerned about the recent excessive volatility in the exchange rate of the yen and its possible adverse implications for economic and financial stability. We continue to monitor markets closely, and cooperate as appropriate.

The strength in the yen is likely the result of two factors 1. the unwinding of carry-trade positions by some hedge funds and 2. it could very well be a sign of major new diversification away from the dollar. The dollar has been strong of late, as mis-guided investors consider a move into the dollar a flight to quality, but as Warren Buffet warns:

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

When the deprecation becomes obvious the yen strength is likely to only intensify.

Any attempts by the G7 to slow the yen's ascent will be short-term in impact. Indeed, the trade to be made is to go long the yen on any moves by the G7 to push it down.

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