Dollar Carry Traders Take Advantage of Fed Stimulus

dollar bill

Why fight the Fed, when you can play right along?

Ultra-low interest rates and a falling dollar have made borrowing in US dollars very cheap vs. many other currencies.

Just as a purposefully undervalued Yen and low Japanese interest rates gave birth to the profitable yen carry trade in the past, a similar dollar carry trade is now gaining momentum.

The Street: The idea is to borrow cheaply and use the proceeds — leveraged up to 20 times — to invest in higher-yielding assets. In other words, the “carry trade.” For the first time in 16 years, short-term U.S. dollar interest rates have fallen under those of Japanese yen, thus making dollar borrowings the cheapest funding vehicle for carry trades into higher-interest rate currencies such as the Australian and New Zealand dollars.

The result is on-going pressure on USD as traders short it (borrow) and buy (invest) into the high yielders.

Gold.. or stocks… might be other purchase targets for dollar carry-traders. Of course, the danger behind the whole endeavour is that the dollar could actually rally back against you.

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