There’s a battle line being drawn, separating those who believe in the dollar carry trade and those who don’t.
Roubini and the IMF both believe in it, and thinks it’s a major problem.
Critics include David P. Goldman, the pseudonymous “Mad Hedge Fund Trader” contributor to this site, and now Goldman Sachs, or at least analyst Mark Tan.
FT Alphaville quotes his latest note:
The IMF in a report prepared for the recently concluded G-20 Finance minister’s meeting cited ‘In addition to foreign funds moving into emerging market equities, led by expectations of higher growth, there are indications that the U.S. dollar is now serving as the funding currency for carry trades.
While there has been a pick-up in investment in higher yielding currencies and assets, there is a distinction to be made between speculative carry trades and investments made on the basis of stronger EM fundamentals. It is hard to draw the line where investment activity becomes a speculative bubble but we do not think that we are in the midst of a ‘carry bubble’ at the moment.
Yes, inflows into EM assets have accelerated rapidly over the last several months but this has also arguably been led by improving fundamentals in these countries in general.
One other point he makes, according to FT, is that a lot of the selling in the USD is being exacerbated by foreign owners of US assets, who are hedging — thus the selling is not necessarily a directional bat on the currency’s decline.