The Japanese yen today breached the crucial barrier of 100 to dollar and reached an intraday high of 99.73 before closing for the day at 100.70. | |
| This is the highest level for the yen in over a decade, though the currency had reached a lifetime high of 79.80 to a dollar on 17 April, 1995. |
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| But unlike the losses sustained by Indian companies on currency options following reversal of Swiss franc in November 2007, dealers said, yen appreciation might not have a major impact either for the direct yen-denominated borrowings or for foreign currency borrowings made in dollars but swapped into yen. Indian companies had used the twin strategies to take advantage of the lower interest rate regime in Japan. |
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| Dealers said that most companies and banks with yen borrowings have taken a hedge since yen has been appreciating since the past one year now. |
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| Most of the structures in Indian companies have already been triggered when yen crossed the crucial psychological barrier of 110 to a dollar. Globally, the markets too have adjusted to unwinding of yen carry trade. |
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| Yen carry trade takes place when investors borrow in yen to invest in other high yielding currencies, like the Australian dollar, for earning interest rate differential. |
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| In contrast, the impact on reversal of Swiss franc was severe since the currency has been ruling stable for almost 10 years, said a dealer. It had been in the range of $1.23-1.25 since October 2006, when most of the deals were struck by Indian banks on behalf of their corporate clients. |
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| The options in swiss franc was struck to hedge their currency risk arising from the dollar and attain stability in the foreign currency interest rate risk since the currency is very stable |
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| Within a year the Swiss franc appreciated from $1.23 to $1.19 on September 7, when the US employment data turned weak, prompting the US Federal Reserve to cut the rate by 50 basis points. Since then the Swiss franc has been consistently appreciating. |
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| A senior executive of Bank of India, which has two branches in Japan, said the impact of yen appreciation will be neutral on its balance sheet since the exposures have been well hedged . A hedge is a counter position taken by an entity to counter the effect of risk arising from interest rate or currency appreciation either in some other currency or in reverse interest rate. |
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| Export Import Bank of India executive director N Shankar said though the bank has raised funds in yen, the exposure was hedged and the bank did not hold trading position in the Japanese currency. |
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