Sunday, September 20, 2009, Source: Shocked Investor
The US Dollar Carry-Trade is Financing Dangerous Global Currency Speculation
As readers here know, we are gravely concerned with the current chaos on world currencies and the collapse of the US Dollar. French newspaper Le Monde says the USD is now the "vedette" of speculators. With interest rates so low in the US, it is the chose mechanism, just like Japan's Yen was.The situation is scary for those invested in money markets are other such instruments considered "safe", as we have also mentioned many times.The USD was the currency that was used as the world's refuge and safehaven during the financial crisis, but is now used by carry-trade speculators. This consists of borrowing money in currencies where rates are lowest then investing this money into currencies that pay more. This raises a huge red flag with certain currencies. The emphasis is mine.Since late August, the U.S. interest rates fell below the rates of Japan and Switzerland. They are referring to the practical rates for banks. Speculators who, since the spring, had borrowed money in Yen and Swiss francs to invest it place in markets where rates were higher (such as the Australian dollar or the New Zealand dollar or, and this is my concern, the Brazilian Real - see my post on Brazilian inflows), are now using the USD dollar. The also invested in raw materials and commodities. To implement these "carry trade" strategies, they need to sell the borrowed dollars, thus the USD was under great pressure, and the currencies in which they were reinvested exploded. Le Monde adds: "Since March, the New Zealand dollar has risen 43% against the dollar." The central bank said that if the appreciation of its currency continues, it could jeopardize the country's economic recovery. "A warning should not be taken lightly, say economists at BNP Paribas. ( ...) It would not be surprising to see the central bank intervening in the event of further increases in the New Zealand dollar against the USD. The United States is a major trading partner of New Zealand, unlike Australia, which deals mainly with Japan and other Asian economies. Rates still low, and too lowSo far, the speculators have been unable to make the dollar fall sharply against the euro. While gold has now crossed the threshold of 1,000 dollars an ounce, the dollar has suddenly stalled, sending the Euro to its highest level since September 2008. Le Monde says that economists do not rule out seeing the Euro soon exceed $ 1.50. In fact, "a very big investor blocked for several days the market so that the dollar did not fall below the level of 1.4450 USD for 1 Euro. But this position did not resist, Tuesday, at the power of the dollar selling wave that followed the summit of G20 finance this weekend of September 4 and 5 September, and this has caused a panic, "said Sebastien Galy, currency strategist at BNP Paribas. The bankers have realized that the cost of borrrowing money will stay low for a long time and they could continue to speculate. Dissapointing econimic data might even encourage investors to take risks and make aggressive moves in emerging markets to the extent that there will be no quick exit from the fiscal and monetary policy expansionary in industrial countries, says the BNP Paribas. Thus the prudence of central banks could turn against them. If they leave rates low for too long, they may create bubbles.Following a monetary policy ultra-flexible conducted since 2001, the Bank of Japan long hesitated in 2006 before starting to normalize its monetary policy. They feared causing imbalances in light of the considerable sums that speculators had the time to borrow yen at very low rates in operations of Japanse carry trade. In March 2006, however, it decided to reduce the facilities it gave to banks. A year later, in February 2007, they began to raise interest rates.This is a very risky and unstable situation. Straddles are a favoured way to take advantage of this explosive and volatile conditions. We will be updating our post on USD straddles this week.
18 comments:
I think the dollar carry trade involves manipulating low interest rates and switching between currencies, which is very dependent upon an economy with limited surprises when it comes to large jumps in rate.
Due to the falling dollar many investors are buying up foreign currencies. The buying of foreign currencies that are rising against dollar is the idea behind the dollar carry trade. This can only lead to more inflationary bubbles of the dollar. Investor who buy up the right currencies can be hugely befitted due to the large pay offs.
The dollar carry trade consists of low exchange rates to foreign currencies,similar interest rates between countries, and flexible monetary policies.
The USD is falling behind other countries currency that never would have thought to surpass it. Investors should be very skeptical to any investing inside of the USD. There are no longer any "safe" investments and it may only get worse. I can not believe that it is to be believed that soon to come one euro will be equivalent to 1.5 USD. The dollar is now based on dismal exchange rates to other countries. With the weak dollar, investors can benefit if they are able to accompany the USD with a more valuable currency.
The dollar carry trade consists of borrowing dollars where interest rates are low and investing in foreign currencies where yields are high. Although it seems the USD will continue to be the favorite currency for the carry trade for a long time, the trend could be reversed if global expectations of inflation start to increase and speculation of higher US interest rates come in play.
-Joe Wierzbicki
By exploiting the dollar carry-trade, investors can make huge profits from investing in foreign currencies. However, as with every transaction, there is a huge amount of risk in investing in markets with high rates. U.S. investors have to be careful with a weakening dollar.
I agree with many of the comments others have left.
For example, I think Joe W's comment is good.
The dollar carry trade, as defined within the article, "... consists of borrowing money in currencies where rates are lowest then investing this money into currencies that pay more."
The important thing to realize is that as the U.S. dollar continues to fall, other currency rise and gain value. This is the hope of those involved with carry trade.
As the USD begins to lose it's value, investing within the United States seems to become less secure. Therefore people are putting their money into foreign currencies, in order to make profits. U.S. investors will be more likely to seek foreign stocks and financial stability.
In this article it states that bankers have realized the cost of borrrowing money will stay low for a long time and they should continue to speculate. This can then cause a sense of panic and cause bankers to attempt risky and aggressive moves in possibly emerging markets, (such as those in foreign countries), in order to avoid the possible consequences of the falling dollar. However, if the interest rates stay too low, this can overall cause great problems for the dollar, the best option is trying discover a profitable or alternative currency that can be used for the USD.
If the U.S. continues to have lower intrest rates than the test of the world, the dollar will continue to have a weaker value than other countries' currency. The economic burden will still fall on the shoulders of many Americans.
I agree with what evan and jenny commented. The low interest rates for American currency have become just another opportunity for investors and speculators to profit on. It is amazing to see the lopsidedness of value between the USD and the euro. The USD is getting weaker and weaker, and this will not help our economy either domestically or globally going into the future.
I agree with what Peter said. investors and speculators are able to easily profit on interest rates on American currency. it is slightly disheartening to see the relationship between the USD and the euro because it allows one to predict that our economy will have a hard time recovering both here and in the world as a whole.
The dollar carry trade must be prevented if at all possible. Inflation will soar and that will be yet another setback for the United States and our economy. While the benefit for carrying out this practice is high, those who perform dollar carry trading should be dealt with to ensure the practice does not continue.
Many investors trying to get as much value for their money as possible are really making the situation even worse for the dollar. As long as interest rates are so low that hole will only get deeper, making it even harder for Americans who are most likely going to take the blow. Across the Atlantic, Europe might benefit since the Euro is getting so much stronger. Seems as it all spins around to the interest rates of the banks, so maybe they should be drastically adjusted.
The dollar carry trade is the process or borrowing dollars using our incredibly low interest rates and using those dollars to fund investments in other currencies that will yield a larger payout. It is an unintended consequence of our easy money policy adopted as a response to the recession. I believe that it is very possible that this could hurt far more countries than the US in the long run, especially when we eventually raise interest rates and the euro takes a dive as the dollar is no longer cheaply available to finance European investments.
The flow from a lower interest rate of currency to a higher one, in the effort to profit through using the low amount of interest involved in borrowing from the low one, and investing into higher yielding ones.
There is a great risk in doing so but, from investing in foreign currencies, investors can acquire large profits from using the dollar carry-trade.
I agree that speculation in overseas markets is devaluing the dollar. I think that once the interest rates go back up the dollar will stabilize.
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