The End of the Yen Carry Trade

This video discusses the end of the Yen carry trade due to the sub-prime meltdown and the dollars weakness.  The yen carry trade is created when a money manager borrows a currency at a low interest rate and invests it into a higher yielding currency.  For example, traders would borrow yen at .5% and invest it into the US dollar at 5%.  This can be done on the forex market through the USD/YEN currency pair. 

The yen carry trade started to unwind itself during the credit crisis of 2008 where the yen dramatically climbed against the US dollar.  In this case, the free money that investors were making with the positive differential in interest rates was erased with a large shift in the currency pair.  Many traders were wiped out and forced to liquidate their positions as the losses kept mounting with the rally in the yen against the dollar.  The high amounts of leverage resulted in many margin calls and substantial losses.