Could The Dollar Carry Trade End Abruptly And In Tears?

London, UK - 5th December 2009, 10:10 GMT

Dear ATCA Open & Philanthropia Friends

[Please note that the views presented by individual contributors are not necessarily representative of the views of ATCA, which is neutral. ATCA conducts collective Socratic dialogue on global opportunities and threats.]

Who is watching the dollar carry trade?

Dollar Carry Trade? The weakness in the US dollar and record low interest rates over time have facilitated a large number of seasoned traders, banks, hedge funds, pension funds and speculators with access to cheap credit to borrow dollars and to buy a variety of risk based assets. What assets? Equities, a wide spectrum of bonds, high yielding currencies and a basket of commodities: primarily precious metals including gold, fuel including oil, and food product. All those asset classes have been showing a positive correlation of near 1 with each other and an inverse correlation of near -1 with the dollar. As a result, when the dollar goes down, equity markets, bond markets and commodities have been going up and vice-versa!

The dollar carry trade remains in vogue for as long as the dollar keeps depreciating in value and interest rates remain low. What happens when the dollar appreciates? Recently, as the US Dollar Index has improved, money has swiftly come out of the risk trade safe havens -- gold and commodities -- to which it ran to protect against a further dollar decline. As an example, gold fell more than 5%, when the dollar index improved by 1.5% on a single day!

Given the dollar's inverse correlation with nearly all asset classes, there are many triggers for the demise of the dollar carry trade. For example, a sustained pullback in stock markets anywhere in the world -- Asia, Europe or America -- could dim the carry trade's attraction immediately as investors rush to the safe haven of the dollar. As they exit and need to meet their margin calls, the speculation in other asset classes could end abruptly. Everybody's piling into equities, bond and commodities, selling the dollar in carry trades, yet the main driver is not recovering earnings, it's the fact that prices keep going up for those asset classes.

Not too long ago, the Japanese yen and Swiss franc, with their near-zero interest rates, were the preferred funding currencies in carry trades. What happened? Those carry trades became a nightmare for borrowers as the currencies appreciated significantly relative to their own. No matter how many players sell the dollar, it cannot reach negligible value. It makes one wonder how fast and how far the market players can short the dollar without running the risk of an unanticipated, abrupt and fast snapback in their face?


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ATCA: The Asymmetric Threats Contingency Alliance is a philanthropic expert initiative founded in 2001 to resolve complex global challenges through collective Socratic dialogue and joint executive action to build a wisdom based global economy. Adhering to the doctrine of non-violence, ATCA addresses asymmetric threats and social opportunities arising from climate chaos and the environment; radical poverty and microfinance; geo-politics and energy; organised crime & extremism; advanced technologies -- bio, info, nano, robo & AI; demographic skews and resource shortages; pandemics; financial systems and systemic risk; as well as transhumanism and ethics. Present membership of ATCA is by invitation only and has over 5,000 distinguished members from over 120 countries: including 1,000 Parliamentarians; 1,500 Chairmen and CEOs of corporations; 1,000 Heads of NGOs; 750 Directors at Academic Centres of Excellence; 500 Inventors and Original thinkers; as well as 250 Editors-in-Chief of major media.

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