The U.S. Dollar Carry Trade Explained That's why the trade of the moment is still: short the dollar and long everything else. All of which should work like a charm for Wall Street. Until the Fed decides to change its bias and raise the cost of money, it's game on. You see, the carry trade is a strategy that enables investors to sell a currency with a low interest rate to buy a different currency yielding higher interest rates. In doing so, they automatically bank a profit by nothing more than earning the spread between the two. I'll give you an example. In today's world, you could borrow one million dollars at very low interest rate (say 1%), featuring a carrying cost of just $10,000. You could then decide to invest that capital into an asset class with a higher yield (say 5%), earning yourself a quick $50,000. As a result of the interest rate spread between the two, you would earn a tidy $40,000 without moving a muscle. What's more: If you pulled the same deal at 10 to 1 leverage, you could earn $400,000 for your troubles. And the best part is that the lower the value of the dollar goes, the more you stand to make. It's this wager â known as the dollar carry trade â that is undoubtedly one of the reasons the dollar continues to fall. However, since the Fed has absolutely no control over where all of this liquidity will slosh, it usually flows into new asset bubbles. . . Which is why every other asset class has risen as the greenback takes a dive. http://www.wealthdaily.com/articles/us-dollar-carry-trade/2189 http://online.wsj.com/article/SB10001424052748704782304574542020902707240.html?mod=googlenews_wsj
And when they do reverse their stance Wall Street will have forward knowledge and be long the dollar well before rates go up.
And if a global event causes a flight to safety response whereby everyone wants to own dollars again, the unwinding of that trade will create havoc in the markets and an explosion of volatility that will rain profits like the fall of '08 on those who are ready.