Monday, November 16, 2009

US Dollar Carry Trade & Stock Market Rally

I'm posting today to explain the dollar carry trade. Many of the analysts who work on wall street explain the big market move higher on the US dollar carry trade. What investors and speculators are doing is going to banks in the United States and borrowing US dollars to invest in assets. The reason investors are borrowing in the United States are the ZIRP or zero interset rate policy of the Federal Reserve. The assets that have been purchased range from stocks, bonds, currencies, and commodities. The worry is that once the carry trade unwinds the market participants will sell their assets purchased during the bubble which will drive the markets lower.
When looking at the partipants in other countries, we will use Japanese investors for example, the Japanese investors first take their Yen and in exchange get borrowed US dollars. The Japanese investors convert these dollars in Brazilian Reals and buy stocks in Brazil, or convert these dollars to Chinese Yaun and buy Chinese Stocks, or convert these dollars to Euros and buy European stocks. When the bubble is over and the Federal Reserve tightens liquidity by ending their lending facilities then Japanese investors will be selling all these assets and use the profits to pay back their loans in the US. Many analysts on wall street say this will cause a huge rally in the US dollar because foriegn currencies will be sold to buy US dollars. This was the big trade in Japan in Japan from 1990 to present.

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