In Wall Street trading on Wednesday, the U.S. dollar plunged to a record low against the Japanese yen--or the yen soared to a post-World War II high versus the dollar, depending on your perspective--amidst concerns about a nuclear crisis in Japan. If the connection between the dollar-yen exchange rate and the Japanese earthquake isn't self-evident to you, it wasn't to us either. Shouldn't investors be fleeing from a currency attached to a country in a nuclear crisis? How are the two events related?
We looked into the matter. Here's what seems to have happened. Traders already spooked by Mideast unrest and today's bad housing data are worried that Japanese insurers and investors will redeem their assets overseas--essentially converting that money to yen--to pay for damages stemming from radiation leaks at Japanese nuclear plants, Bloomberg explains. There is also concern that Japanese investors, alarmed by the crisis in their country, will pull out of risky investments abroad. A currency strategist tells The Wall Street Journal that during times of trouble, investors also tend to purchase "safe-haven" currencies like the Swiss franc and the yen, which is considered safe because Japan is a net creditor to the rest of the world. "It may seem counterintuitive, since this is something happening in Japan, so naturally one might think the yen would weaken," he says.
At its low point today, the dollar was worth 77.32 yen, the Journal reports. Traders are now wondering whether Japan's central bank will pump more yen into the currency market to stem the yen's rise, since a stronger currency renders Japanese exports less competitive and threatens an already reeling economy.