The Dollar Carry Trade

One other reason to sell the dollar is interest rates.  Why not borrow in dollars where interest rates are low and invest elsewhere where yields are high?  This is what is known as the carry trade.

In the past decade, the Japanese yen and the Swiss franc were favorites for the carry trade because of their low yields.  But now, the U.S. dollar presents the same opportunity due to the likelihood that rates will stay low for a long time to come.

The video below explains.

See also Is the Dollar Set to Become the New Yen? from Market Beat.

  1. Anonymous says

    Pleased by the prospect of the dollar declining? If foreign investors stop buying US bonds, that would be just great? The only mechanism for getting the trade deficit down is a lower dollar? It makes me sad to hear such views by prominent US economists.

    Well, even Botswana can lower its deficit in this way. This is not an “accounting identity”, as Dean Baker called it. It is an accounting gimmick and a beggar-thy-neighbor policy. What if every nation was going to follow retaliatory competitive devaluations of their currency? According to the economics I know and have been teaching my students, this is a short-term “solution” which will backfire. Is it by accident that the world’s least competitive countries are the ones that are constantly devaluing their currencies? The trade deficit can only be reduced by increasing competitiveness and productivity, technological superiority, innovation, entrepreneurship etc. A constantly declining dollar will bring about inflation and higher interest rates for obvious reasons. US consumers’ purchasing power will drop. This will hurt manufacturing through a drop in consumption and demand for their products, and through an increase in their financing costs and imported raw material costs. They will become less competitive. This will increase the trade deficit. The decline of the dollar and its consequences will be exacerbated by the foreigners dumping the dollar and the dollar-denominated assets. I don’t know who will then finance the US debt. Americans will also try to protect their life’s dollar savings by converting them to stronger currencies, investing them in foreign-currency assets and perhaps moving them offshore. This capital exodus will further negatively impact the US current account deficit. Wall Street will plummet, and it will be very difficult for US companies to raise capital. A long-term Depression will hit the country. It’s a vicious circle. And gradually but surely the world will move to other reserve currencies. America’s economic and political standing in the world will erode.

    1. Lou Pavia says

      I agree with you 100% PKPETRO
      There will be a 2nd GFC due to weak US dollar
      Gold will skyrocket as the US dollar drops
      If Gold is to hit $5000 OZ then the value of the US dollar is going to drop 80% on todays value and i can see this happening.

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