While the dollar and US economy will continue to weaken because of the weakening housing market, rest-of-world currencies will grow stronger.  And while some other countries may follow the US rate reduction (like Europe), Japan has a very low interest rate right now, and only has room to go up. 

While the dollar and US economy will continue to weaken because of the weakening housing market, rest-of-world currencies will grow stronger.  And while some other countries may follow the US rate reduction (like Europe), Japan has a very low interest rate right now, and only has room to go up. 

Japan's Boom May Explode Yen-Carry Trade

By William Pesek Jr., Bloomberg News

Feb. 22 (Bloomberg) -- Surprisingly strong growth in Japan is raising many eyebrows, not least those at the central bank anxious to scrap its zero-interest policy.

There can be little doubt 5.5 percent growth between October and December pushed the Bank of Japan further in that direction. Oddly, there are few if any signs global markets are bracing for higher debt yields in Japan.

Being a contrarian, I suspect that the yen carry trade will reverse in the near future. Although Japanese interest rates may not rise, the carry trade could unwind if Japan’s economy strengthens leading to greater corporate profits and rising equity prices. Then the Japanese stock market, which was one of the wost performing stock markets last year, would begin to out-perform global assets. This would cause capital to return to Japan and the yen to appreciate.