Wednesday, September 23, 2009

US Dollar Carry Trade Currency?

The statement from the Federal Reserve that slow economic conditions "warrant exceptionally low levels of the federal funds rate for an extended period," caused great pause today for those understanding what this will mean for the U.S. dollar, as it will probably take the place of the yen as the currency used for carry trades.

A carry trade is when an investor borrows using a currency with low interest rates for the purpose of investing that capital in higher-yielding assets. The problem with that is it is bad for the currency used as the investment of choice to start the process, which looks to be the U.S. dollar through probably a minimum of 2010.

The Federal Reserve said these conditions will continue, essentially reinforcing the reality that the U.S. dollar will be the carry trade currency going forward, although obviously not stating that specifically.

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