Not only did hedge funds jump from one source of financing to another, it appears they have shifted their long positions as well. At the end of June, however, total net purchases of all U.S. securities by foreigners were below the levels of 1997. But with the spike in gold prices and better performance of European currencies, hedge funds have begun to run out of cheap sources of financing. We think the dollar's weakness since the unwinding of the yen carry trade is no coincidence. After all, the dollar has dropped against our major trading partners, and has been especially weak against the yen.
Interest rates are higher, the stock market is lower.
A falling dollar will also raise the price of imports. Given our heavy reliance on foreign goods, higher import prices hurt consumers and businesses alike. With less foreign interest in U.S. fixed income securities, U.S. interest rates could continue to rise. Corporate yield spreads could widen further and higher rates would certainly place further constraints on consumer borrowing. Adjustable rate debt would grow more expensive for consumers and opportunities for refinancing windfalls would disappear.