Another blow to Japan: Yen nears all-time high vs. dollar

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The Japanese yen neared a record high against the dollar on Wednesday, compounding the woes of the nation’s economy as it struggles to recover from Friday’s earthquake and the nuclear crisis.

The dollar fell as low as 79.83 yen, down from 80.72 on Tuesday and just above the all-time low of 79.75 yen reached in 1995. The dollar was at 82.98 yen just before the earthquake.

A rising yen means Japanese exports become more expensive for foreign buyers, unless manufacturers hold prices level and instead take the hit in their profit margins.

Although it seems counterintuitive that Japan’s currency should be appreciating at a time like this, the yen is gaining in part as frightened global investors turn to traditionally strong currencies as a place to hide.

What’s more, it appears that currency traders are doing some “front-running” -- betting that the yen will rise as some Japanese investors and companies sell assets held abroad and bring the money home, in turn boosting demand for yen.

Japanese insurance companies, for example, are likely to repatriate funds to pay for damage claims from the earthquake and tsunami.

The yen’s gains “are mostly risk-aversion and the expectation of repatriation,” said Brian Dolan, chief currency strategist at Gain Capital in Bedminster, N.J.

Also, hedge funds and other speculators may be unwinding trades in which they borrowed yen at cheap interest rates to invest in higher-risk investments worldwide. As markets fall and those trades are closed out the speculators must convert assets to yen to pay off the loans.

The question now is whether the Bank of Japan will try to intervene to weaken the currency by buying dollars and selling yen.

“Probably somewhere in the 79.50 area is where they’ll step in,” Dolan said.

But with everything else going on, ‘I don’t know how they can pay attention to this,’ said Win Thin, a currency strategist at Brown Bros. Harriman in New York.

-- Tom Petruno