Carry Trade Redux - Japanese Yen at 13 Month High

Two weeks ago I warned about the implications of the Carry Trade and what it could mean for the global economy. It appears the dangers have only increased with the Japanese Yen strengthening to a 13 month high against the dollar. Since many US hedge funds have used low interest loans from Japan to finance their leverage, this could have several implications. 1) The cost to service these loans will increase just when the funds are under great pressure from the credit markets; 2) rising Japanese interest rates will drive the debt costs higher; 3) The Japanese may begin to call-in some of their loans, forcing hedge funds and banks to further liquidate their assets.

The Yen/Dollar carry trade is estimated to be $1 trillion dollars so its something to watch closely.