The mayhem that swept across world markets was partly caused by a market strategy known as the carry trade, where traders borrowed in Japanese yen for investments in other currencies, then rushed to sell U.S. dollars due to rising risks.
Carry trades involve borrowing at low cost in one currency to achieve higher returns from investments in another. Borrowing in Japanese yen for U.S. stocks and bonds was a recent example.
The Bank of Japan's interest rate hike led to unwinding carry trades as traders faced higher borrowing costs and losses, causing a surge in the Japanese yen value against the U.S. dollar.
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