Global risk appetite could be key

On the flipside, however, the carry trade remains a critical force behind yen direction, and forex traders would be well advised to watch for shifting winds in global risk aversion.

Additional flattening of carry trades later in 2007 could weigh on the dollar/yen. Buskas sees potential for the pair to retreat to 110.00 by the third quarter.

“The U.S. sub-prime market is looking very weak, and a lot of global investors have been buying into the sub-prime market,” she says. “The yen will rally as investors continue to unwind the carry trade in 2007.”