Dollar-Driven Carry Trade Threatens Asset Prices

In Financials on October 26, 2009 at 13:17

carry tradeThe Federal Reserve has made its intentions clear keeping the key rates at near-zero rates for as long as it’s needed, as opposed to the ECB where officials are prepared for an exit strategy as soon as inflationary expectations ’emerge’.

Carry trade is when investors borrow money at a low-rate denominated currency like the dollar, and invest in a higher-rate denominated currency like the New Zealand dollar or the Turkish Lira. Ever since Bernanke dropped rates to the historically low levels of 0%-.25%, carry trade has been compressing the dollar value. Today, the dollar fell as low as $1.5063 per euro, its weakest rate since August 2008.

As economist Nouriel Roubini, aka Dr. Doom, pointed out, asset prices have been globally inflated by the cheap dollar, so when the ‘greenback’ reverses its course, a major crash may hit asset markets as investors will bail their funds out for the dollar.

Although low rates may be essential for the ‘reseting’ of the US and the global economy, we don’t want to fuel another bubble on the doorstep of recovery. It’s urgent for the dollar to be stabilised for the global markets to seek for sustainability.

by the Self-Seeker

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