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Foreign Exchange

Yen-dollar outlook for 2010 divides analysts

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Strongly contrasting predictions for the dollar/yen exchange rate were issued this morning by Deutsche Bank and Saxo Bank, two banks with busy FX trading businesses.

Saxo likes to make 10 "outrageous claims" in its annual markets outlook – one of them this year is that the dollar will strengthen from ¥89.30 at present to ¥110.

"Although the downtrend in the USD is rooted in irresponsible fiscal and monetary policies," the bank commented, "we believe that the USD might snap back at some point in 2010, because the USD carry trade has been too easy and obvious for too long."

The carry trade, in which investors borrow in a weak currency to finance purchases of assets in higher yielding currencies, became a powerful force in currency markets in the Noughties, with borrowing in yen. During the financial crisis, dollars were used instead.

Saxo also thinks the yen’s present strength does not reflect "economic reality in Japan, which is struggling from a huge debt burden and an ageing population".

The Danish bank also recommends going long the 10 year US Treasury and short Japanese Government Bonds.

Deutsche takes a consciously contrarian view on Japan, which it headlines as "Against the Tide, Yen to Abide".

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