Sunday, December 21, 2008

Dollar Carry Trade Is Bigger Than I Thought

Just got new information on Friday: it's a little bit easier to get dollar credit in Russia for good businesses than credit in local currency. Means that I was wrong in my previous post: dollar carry trade is returning to Russia. Then it should be returning to other places as well, including Brazil and Asia.

I don't know if this is good or bad news. Definitely, fall of dollar in the last three weeks was caused by carry trade. Can dollar fall even more? Don't know, depends pretty much on loan repayment conditions. If most loans were short term, repayment is coming right now for monthly and four week loans, and borrowers will have to buy dollars to pay back. But they might choose to refinance the loan. At the same time more borrowers will get loans from carry trade.

Bad thing, dollars are still not going to US businesses. And this situation reminds pretty much Japan in 1990s. When Bank of Japan cut rates to zero, yen carry trade exploded, but local businesses still couldn't get credit cheap enough.

There is hope, it's coming from two sources:
1. Events are moving much, much faster now, than in Japan in 1990s.
2. US enterprising spirit. It always invents something new, something the whole world needs. Not always good things, but always new: personal computers, mass adoption of cell phones, commercial software. Also collateral debt obligations and multiple financial derivatives.

If we follow Japan's path, dollar rate should stabilize at current or little bit lower rate. Don't see how to make money off it, unless you participate in dollar carry trade.

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1 comment:

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