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Carry Trade Sends Currencies Soaring

By    |   Friday, 17 Apr 2009 10:47 AM

It’s back. The carry trade, that is — borrowing in low-interest rate currencies to invest in high interest-rate currencies.

That trade worked out well in the 1990s, when investors made oodles borrowing yen at interest rates near zero and then investing the proceeds in just about any other currency.

But then came the financial crash, and high-interest rate currencies like the dollar turned into low interest-rate currencies.

The carry trade dropped three straight years from 2006 through 2008, the longest streak since 1976 to 1978, with an average annualized loss of 16.5 percent through Feb. 28, Bloomberg reports.

But now massive fiscal stimulus in developed countries has lifted investor confidence in currencies of emerging market and commodity producing nations.

Interest rates are higher in those countries, as much as 12.9 percentage points higher, than in developed economies, which have pushed their rates down to nearly zero.

So investors are borrowing dollars, euros and yen, then selling them to purchase the currencies of

Brazil, Hungary, Indonesia, South Africa, New Zealand and Australia.

The carry trade earned a whopping 8 percent from March 20 to April 10, its biggest three-week gain since at least 1999, according to Bloomberg data.

“We’re set for a period of some classic risk currency trades, where you sell the dollar against emerging-market currencies.” Dale Thomas, head of currencies at Insight Investment Management, tells the newswire.

The trade may work for a while. Experts such as Jim Rogers expect the dollar to weaken at the expense of emerging market currencies.

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It’s back. The carry trade, that is — borrowing in low-interest rate currencies to invest in high interest-rate currencies.That trade worked out well in the 1990s, when investors made oodles borrowing yen at interest rates near zero and then investing the proceeds in just...
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Friday, 17 Apr 2009 10:47 AM
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