There is a quite a lot of talk about the dollar carry trade. In essence this means that dollars are being used to buy assets (other currencies) with higher yields. This is, in effect, selling the dollar. This selling causes the value of the dollar to fall relative to the currency being bought. (I’m not sure if that part is right. It doesn’t seem right that selling the dollar and buying another asset would cause the value of the dollar to fall against all other currencies, so i’m assuming…)
If the yields for holding dollar denominated assets rise (stock market indexes, or bond yields, increase) the non-dollar assets are sold to buy these now higher yielding assets. The value of the dollar rises relative to the currency being sold. (similar caveat to above)
As the dollar carry trade is currently considered to be huge (larger than the yen carry trade that proceeded it!) the effect on the value of the dollar is large. However, the stock markets in the US have been rising for some nine (plus) months, which must temper some of the possible decline in the dollar. There are also different classes of risk, meaning that some of the money flowing around might consider the equity markets too risky, and would flow into government bonds (with higher yields than US treasuries). In all likelihood, given the general trend of massive public sector borrowing, there are lots of high yielding bonds out there to buy. If holding these bonds becomes too risky, the money will flow out again, back to lower yielding, but presumably safer assets (US Treasuries, for example).
Assuming that there is some kernel of truth in the above, it makes sense that the Yen is remaining stubbornly strong against the dollar, even while everyone and their dog is predicting japanese sovereign default. Yields on japanese government debt are low (because the debt is held in Japan …that’s not really an answer, but let us just say that it is possible for the MOF to borrow cheaply, just “because”) and other yen denominated assets are not attractive (deflation; would you want to buy a shrinking pie?!) Therefore, very few of the dollars that were sold resulted in yen being bought. And conversely, as these carry trades unwind, very little yen is being sold…
Having written all that down, i’m not convinced… all it says to me is that the yen is sort of in a no-mans-land, languishing in the doldrums, while the action happens elsewhere. Perhaps it’s just that with a positive trade balance, companies are constantly having to buy yen to repatriate revenue.