Dollar Drops Against Yen

Ongoing problems related to the credit markets helped boost the Japanese yen and the Swiss franc Tuesday as speculators unwound their carry trades.

The dollar was buying 114.8 yen, down from 116.1 yen late Monday. The Swiss franc was changing hands for 83.3 cents, up from 83.1 cents a day earlier.

The carry trade involves selling short a low yielding currency, such as the yen or the Swiss Franc, and investing the proceeds in a higher yielding one, like the Australian dollar, for a profit.

However, the varied problems in the mortgage market have left some money managers needing to quickly raise cash in order to cover redemption requests from increasingly anxious investors, explains T.J. Marta, a markets strategist at RBC Capital Markets in New York.

That's why many are scrambling to close out their short currency positions by buying yen and Swiss francs, he continues.

At the other extreme, higher yielding currencies were performing poorly. The greenback was buying 1.22 Australian dollars (A$1.22), up from A$1.206 the previous day.

Euros were little changed at $1.36.

The exchange-traded funds that track the value of the yen and the Swiss franc were rallying. The CurrencyShares Swiss Franc Trust(FXF Quote) was up 0.3%, and the CurrencyShares Japanese Yen Trust(FXY Quote) was rising more than 1%.

Securities tracking the euro and the British pound were edging lower, with the CurrencyShares Euro Trust(FXE Quote) and the CurrencyShares British Pound Sterling Trust(FXB Quote) both off about 0.1%.