Reversing the Dollar Carry Trade

Posted by Michael Berry , Ph.D. - Discovery Notes

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1. The East Asia Co Prosperity Sphere: The Next Asia
2. The Reversal of the Dollar Carry Trade

Here we go again.  If you have been a reader of Morning Notes for the past couple of years the following table of exchange rates is déjà vu. There is a rush to buy the dollar this AM and it is soaring. Why the rush?  Because the global investment community has borrowed in US dollars at essentially zero interest rates and invested elsewhere – the infamous carry trade.  I suspect there was a carry trade in biblical times though I cannot find the data to prove my point. The carry trade is the simplest of trades.  It is to borrow in the low overnight interest rate country and invest in the high yielding country. We often see these trades go bust because, of course, the end result is an asset bubble of some sort.  The Yen carry trade of the past two decades is perhaps the most well known example.  Please examine the following currency table from Kitco this AM. Sure enough, the US currency is stronger against all its fiat cousins except, unfortunately, the Japanese Yen.  Poor old Japan – she never got over the bubble of the 40,000 Nikkei equity index in 1989 or for that matter her dastardly attack on Pearl Harbor 68 years ago today.

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