November 7 US dollar from Fund to High Yield Currency?

Key Benchmark Interest Rate			Currency
Country	Nov. 3, 2005	Year To Date Change	Year To Date Change^
U.S.	4.00%	1.75%	-
EURO	2.00%	0.00%	-11.80%
Australia	5.50%	0.25%	-5.52%
China	5.58%	0.27%	2.38%
Hong Kong	5.50%	1.75%	0.26%
India	5.25%	0.50%	-3.98%
Indonesia	12.25%	4.82%	-7.59%
Japan*	0.15%	0.00%	-12.59%
Korea	3.50%	0.25%	-0.80%
Malaysia	2.70%	0.05%	0.62%
Philippines	7.50%	0.75%	2.79%
Singapore	2.38%	0.92%	-3.80%
Taiwan	2.13%	0.38%	-5.46%
Thailand	3.75%	1.75%	-4.77%
*Since 2001, the Bank of Japan (BOJ) has targeted the outstanding balance of the current accounts at the BOJ rather than the overnight call rate. ^Relative to the U.S. Dollar Source: Bloomberg, Bank of Thailand, Bangko Sentral ng Pilipinas, Central Bank of China (Republic of China, Taiwan), The People's Bank of China.

Table from Matthews Funds Asia

According to Morgan Stanley’s Stephen Jen, ``The evolution of the dollar from a funding to a high-yield currency is a monumental shift in the global currency markets. The cost of funding is particularly important for exchange rates. First, it will be much more expensive to short the dollar. Second, with global equity portfolios overweight on non-US equities, the opportunity cost of not hedging against currency risk rises with the cash and short-term interest rates in the US. Third, investor risk aversion is likely to rise. With inflation the main source of risk, I don’t expect to see bonds and equities exhibit as strong an ‘offsetting’ pattern as usual.”

Rising interest rates in the US has definitely provided a boost to the US dollar while closing the yield gap among many Asian currencies. Except for the Philippines which has gained from its domestic interest hikes, as well as formerly pegged currencies as China’s remimbi and Malaysia’s ringgit, it appears that the ‘carry trade’ have shifted from borrowing low yielding Euro and Asian currencies and long Asian equities or dollar denominated assets. The current fund migration towards global equities could be such a result.