US Dollar as a Carry Trade Currency !…Why Not !?

With the stock bubble and the real estate bubble in Japan leading to it’s currency,the Yen becoming the Carry Trade Currency for over a decade we’re now seeing a very huge possibilty of the Yen giving way to the the World’s (yet) Reserve Currency,the US Dollar, in becoming the preferred Currency for Carry Trade !

For the first time since 1993,the three month LIBOR for the US Dollar slipped to 0.292 %below that of the Japanese Yen rate of 0.352%

It’s cheaper to borrow dollars and then switch them to other higher yeilding currencies

Investors increasing and profitably used such leverage by borrowing cheaply in Yen,and rather than consume and invest in Japan itself,transfered the Yen to other higher yeilding currencies to benefit from the Interest Differential…benefiting also by the depreciation in the Yen

The Depreciation (Demise is too strong a word yet!) of the Dollar looms large in the coming years as

  • USA Debts and Deficits balloon to unmanageable proportions…search my earlier blogs for quantum
  • Fed keeps the rate low,towards Zero and has little choice but to continue to print more and more of the US Dollar Currency…After continuous Rate Increases in 2004 (5),2005(8) and 2006(4),the Fed dropped rates thrice in 2007 and SEVEN times in 2008,with the last drop of a huge 0.75% in December 2008 bringing the Rate close to Zero,leaving little place to drop further !…the Fed meets tomorrow for the sixth of it’s eight scheduled annual meeting to discuss rates…any change is unlikely
  • US Dollar loses it’s status as the World’s Reserve Currency
  • Countries like China begins exiting US Dollar Investments…US $ 800 Billion of it’s FX Reserves of near $ Two Trillion are in US Treasury Bonds….Countries will begin dumping the Dollar once they realise that they do not need them
  • Oil Trade will switch from the existing predominantly Petro Dollar Trade to other currencies

This potential Depreciation of the US Dollar will bring in an additional benefit for those who have borrowed in US Dollars at low Interest rates…they stand to make currency gains over and above the interest differential….The fall is already being evidenced…In the last six months the US Dollar Index (DXY) has dropped near 15% from 89 to 76.This Index measures the performance of the US Dollar against six major currencies….Euro,Canadian Dollar,Swedish Krona,Swiss Franc,Japanese Yen and the Sterling Pound

And remember that any significant depreciation of the US Dollar will hurt USA Imports and raise the price of Gold,Oil and other commodities…thus increasing the Cost of Living and making Overseas Travel more expensive from USA

So go ahead and Borrow cheaply in US Dollars !…Who knows,you may not even have to repay it ! if the US Dollar sinks to crazy lows in the years to come…that’s stretching it a bit ! …but I’m sure you get the point !   

Cheers !

2 thoughts on “US Dollar as a Carry Trade Currency !…Why Not !?

  1. Hi Gaurav,
    That’s a good analysis-it is an example of covered interest arbitrage-the interest rate difference should be matched by an appreciation of the low interest currency to prevent that-otherwise it is enabling riskfree gains for borrowing in USD and investing overseas. You gave good reasons why the trend for USD canl continue what with the Ostrich-like policies of Obama based on the assumption that more money supply is going to tide over a major fundamental problem. The Pound is as much vulnerable though the approach of the regulators is more conservative there. There is too much ‘coupling’ of the GBP with USD for comfort.

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