STEM major here. I saw this recently about how Japan raised its interest rates to .25%. Can someone please explain to me how this strengthens the yen? In addition to this why would the US increasing interest rates at this time decrease the value of the dollar? Please help me I’m lost here 😅 have a great day everyone!
In: Economics
This is a really weird case. Because Japan had really low (even negative) interest rates, a lot of people put up foreign currency as collateral to borrow way more Yen for free (or even to get paid to do it). They then sold those Yen, dropping the value of them, to purchase foreign currency such as Dollars and invest them, further enhancing their gains.
When the interest rates rose above zero, the people who held those loans suddenly owed some money, and had to sell their Dollar-denominated securities and buy Yen. That raised the price of Yen. Now, the collateral they put up is not enough to cover the loan, so…they need to sell more Dollar-denominated securities and buy *more* Yen.
Wash, rinse, repeat.
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