Summer Article #1: Exchange Rates

Dollar-euro? It's the yen, stupid

This article discusses the impact of the strengthening yen on the American economy. Although many people often compare the dollar the Euro, claiming that it recently "hit a record low against the Euro", this article argues that the concern lies in the drastically increasing value of the Japanese yen. In the past years, Japan has been known for its extremely low interest rates, causing a large number of American investors to borrow and sell Yen. This form of trade is so popular it has come to be known as the "yen carry trade." According to Ashraf Laidi, chief analyst at CMC Markets in New York, the strengthening yen is becoming a problem: "The yen is a funding currency. When it rallies, it makes the repayment of those yen loans more expensive, even though interest rates are low," he said. The American investors initially borrowed the yen due to the relatively cheap cost of doing so; however, they now face the consequence of the increased value of the yen: what they must pay back is of greater value of what they borrowed. Although low interest rates means the actual amount of yen the investors must pay back has not drastically increased, the fact that the exchange rate is now higher means that the value of the yen they must repay has increased. In other words, whatever profit they made have made off of their investments will drastically decrease.
On the other hand, a positive effect of the relatively low value of the dollar is the fact that exports will dramatically increase, as the cost for other nations of buying raw materials and products from the US is relatively lower to anywhere else in the world (or at least Europe and Japan). The US will therefore be exporting more goods to other countries and import less. For the United States, which usually has a trade deficit as it has a large number of imports, increased exports may benefit their economy as it will increase their balance of trade, which is defined as a country's exports minus it's imports.
In other words, the increased value of the yen and the Euro may be horrible for American investors, but in the end, the American economy may be benefiting.