Japanese stock market may favor USD

In the last week, the Japanese stock market witnessed a massive ‘correction,’ as the Nikkei Index fell by almost 10%. Accordingly, many reckon the markets’ year-long strength may be coming to an end, and are warning against the possibility of investors removing their capital and transferring it to other countries, namely the US. In the last month, US capital inflows far exceeded the current account deficit, which can be attributed to continued faith in US capital markets. Analysts have cautioned, however, that the USD could depreciate if foreigners suddenly lose their appetite for investing in the US. The Financial Times reports:

[One economist] warned he “feared the worst for the dollar” if yield differentials were to become more attractive elsewhere. Another bearish factor for the dollar would be if equity weakness lowered expectations for further tightening, he added.

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