What is the carry trade as it applies to currency appreciation or depreciation?
May 7th, 2008
skahhh asked:
An economic guest speaker on CNBC said that because of the carry trade some of the currencies have been beaten down. What was he talking about?
SAKAMOTO
An economic guest speaker on CNBC said that because of the carry trade some of the currencies have been beaten down. What was he talking about?
SAKAMOTO
when one currency has very low interest rates, they borrow that currency and pay the low interest rate. They then sell it any exchange it into another currency that has higher rates, or better return prospects in the second currencies stock market. In theory, the amount that they earn in the second currency is in excess of what they are paying in the low interest currency, thereby generating positive returns on generally borrowed money. The yen used to be the currency they sell, and they bought euro’s or us dollar. Now with US rates so low, and the us stock market not a place that people want to invest, there is concern that the US dollar bcomes the carry trade currency, which keeps the dollar low. When the carry trade reverses, it can cause big swings in the exchange rates. tba
the currency speculators.