Currency strategists at UBS claim that the greenback is trapped between 80 and 85 yen since late September 2010. The specialists believe that such dynamics of the pair USD/JPY may be partly explained by the current steep slope of yield curves all over the world. As a result, investors benefit from carry trades in one currency: they borrow and lend without taking any forex risk.

According to UBS, yield curves will flatten only when the Fed stops QE and investors start to consider major central bank rate hikes in second half of 2011 and in the first half of 2012. By then, traders will switch back to cross-currency carry trades borrowing in yens and buying higher yielding foreign currencies.



Chart. Daily USD/JPY

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