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By Staff Reporters
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A carry trade is a tactic in which an investor borrows a currency with lower interest rates and invests the proceeds in a higher-yielding asset, often in a different market with higher interest rates.
CITE: https://www.r2library.com/Resource
Over the past few years, many funds were using this strategy by buying US equities or selling US bonds with money borrowed from the yen because of the huge disparity in interest rates between the US and Japan. Japan kept the yen cheap on purpose because its economy is primarily export-driven, and the low price of Japanese products kept exports thriving. And the dollar, as the dominant global currency, has remained impressively strong through thick and thin.
This was all fun and profits, until Japan raised interest rates for the first time in 17 years last week. Suddenly, the yen wasn’t as cheap as it once was. And at the exact same time, the US is expected to cut interest rates in September, which means the dollar would become less valuable, completely throwing this international carry trade out of balance
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Filed under: "Ask-an-Advisor", Accounting, Industry Indignation Index, Investing | Tagged: bonds, carry trade, equities, interest rates, IRS |
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