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yen carry trade !
https://g.co/gemini/share/8957aecac38a
The persistent and widening monetary policy divergence between the United States and Japan has fueled the growth of a massive, multi-trillion dollar yen carry trade, embedding a significant and often underappreciated systemic risk into the global financial architecture. The primary threat to the U.S. dollar and its domestic financial markets stems not from a direct challenge to the dollar's reserve currency status, but from the violent mechanics of a potential disorderly unwind of this colossal trade. Such an event would trigger forced, large-scale liquidation of U.S. assets—primarily equities and bonds—by global investors who must rapidly repatriate capital to cover their yen-denominated liabilities. This dynamic creates a dangerous reflexive feedback loop, where the very act of the Federal Reserve easing monetary policy to support a slowing U.S. economy could accelerate the unwind by narrowing critical interest rate differentials. This action would paradoxically lead to a tightening of financial conditions, the precise opposite of its intended effect. While a 2008-style cataclysm remains a tail risk, particularly given recent shifts in speculative positioning away from a crowded short-yen consensus, the yen carry trade dynamic represents a material threat. It constrains U.S. monetary policy flexibility and creates a fragile "damned if you do, damned if you don't" scenario for the U.S. dollar, where both excessive strength and weakness can precipitate the same destabilizing outcome: foreign liquidation of U.S. assets.
Published on 2 months, 2 weeks ago