Monday's global stock market sell-off led to calls for the Federal Reserve to step in , but that could prove to be even more trouble for investors. This sell-off is not being driven banking crisis, and an emergency rate cut by the Fed may hurt more than it helps, said Lawrence McDonald, a bestselling author and market risk expert. "If they do that, they weaken the dollar, they actually strengthen the yen, and this whole carry trade gets worse," McDonald said.
As a result, hedge funds and other investors were able to borrow yen cheaply and then buy assets around the globe. This trade worked as long as the gap between the Bank of Japan and other central banks stayed wide and the yen was weakening against other currencies, such as the dollar. And it was working up until late July, when the Bank of Japan hiked its benchmark interest rate and said it would tap the brakes on its bond-buying program.
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