Here’s the best explanation I’ve read yet – courtesy of Everbank’s Chris Gaffney – in today’s Daily Pfennig:
These investors had to sell some of their higher yielding assets to make up for the losses, and a move toward deleveraging started to emerge. As these first investors sold these assets, their price dropped, forcing still others to sell. The credit crisis, and the lockup of the credit markets was a final straw in the leveraged carry trades. Even investors who wanted to stay in the trades could no longer get the loans to keep these trades alive. They were forced to deleverage, selling their investments to pay back the loans.
So the benefactors of this deleveraging of the financial system? The Japanese yen and the US$, currencies which were used to funds these carry trades. The US and Japan have some of the worlds largest banks, and extremely low interest rates making them the perfect funding currencies for the carry trades. As the deleveraging has occurred, investors have purchased back these currencies to pay back loans.