Carry On

Once I rose above the noise and confusion
Just to get a glimpse beyond this illusion
I was soaring ever higher
But I flew too high
--Kansas

In the past couple of weeks, the number of articles about the dollar carry trade has increased considerably. A carry trade is when you borrow money at low cost and you invest it in positions perceived to provide attractive returns. Investors seek to make money on the 'spread' between the rate of return and the cost of funds.

The emerging thesis appears to be that, because the Fed is likely to keep rates low for a long time, speculators are likely to borrow huge quantities of cheap dollars and speculate with them--perhaps lighting a persistent bid under asset prices.

Could it happen? Sure. But keep in mind that those who borrow cheap dollars and then buy other assets with them are effectively short the dollar. At some point, they'll need to buy those dollars back to close out their trade. Late last year the dollar rallied on the back of big closure of dollar-denominated debt projects.

If/when another round of deflationary risk aversion sets in, then the dollar carry is once again likely to shift into reverse.

position in USD