Tags: IMF | dollar | carry | trade

IMF: Low Rates Fund Risky Dollar Carry Trade

By Dan Weil   |   Monday, 09 Nov 2009 02:07 PM

First it was NYU economist Nouriel Roubini, now the International Monetary Fund (IMF).

Like many others, the IMF is growing concerned that a global dollar carry is trade pushing up assets worldwide — and risking a collapse if U.S. interest rates begin to rise.

The “trade” in questions consists of borrowing dollars to take advantage of miniscule U.S. interest rates and then putting those dollars into assets around the world, including U.S. stocks and junk bonds to emerging markets and even Hong Kong apartments.

“There are indications that the U.S. dollar is now serving as the funding currency for carry trades,” the IMF warns in a new report.

“These trades may be contributing to upward pressure on the euro and some emerging economy currencies.”

Rising currencies hurt Eurozone and emerging market countries by making their exports more expensive.

In addition, a falling dollar could make it difficult for the United States to attract foreign capital to finance $1 trillion budget deficits.

“The dollar remains the weakest link,” Boris Schlossberg, research director at GFT Forex, tells Bloomberg.

“Labor-market conditions are still very challenging in the U.S., and the rest of the world is improving faster.”

Roubini’s concern focuses on a dollar rebound.

“Now we are in the mother of all carry trades," he told CNBC. “Everybody is shorting the dollar, borrowing and investing in assets all over the world.”

But then comes the danger.

“Once the dollar stops falling, you have a sudden reversal of the dollar, you have to close your shorts, you have to dump assets, and you could have a market crash all over the world,” Roubini says.

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First it was NYU economist Nouriel Roubini, now the International Monetary Fund (IMF).Like many others, the IMF is growing concerned that a global dollar carry is trade pushing up assets worldwide — and risking a collapse if U.S. interest rates begin to rise.The “trade” in...
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