foreign currencies demand depends on the market situation and the investors’like. The increase or the fall of foreign currencies demand is ususally one of the thermometers that show the actual trend of the market. What happens with the yen, for example a weak currency but that often is one of the foreign currencies that has the biggest demand? What is the reason of this trend? Japanese currency has become the center while deciding whether to invest or not for risk investors. Japanese foreign currencies demand shows that the advantage that the yen has in front of other currencies, is the low interest rate. When investors are determined to assume more risks, they get into debt on a cheap way in yenes, taking advantage of the law interest rates and then they invest on countries where returns per investment are higher. That’s the way foreign currencies demand answers to the risk that investor is determined to take.
This operation that we have descrived previously debilitate the Japanese currency as moneylenders sell yenes and buy other foreign currencies. Situation changes according to foreign currencies demand when investors avoid risk. These operations are know as carry trader, basically what they do is buying a foreign currency to sell at the same time other. In this way, investor bet to have one foreign currency appreciated according to the other.
A very common carry trader, that takes a fundamental part in foreign currencies demand, is to borrow money in Japan, which reference interest rate is 0.5%, and invest in Australia, that has an interest rate of 6.75%.