Low Interest Spurs Investors to Borrow US Dollar


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Betting against the dollar is becoming the trade investor can’t afford to ignore.

The US Dollar Index fell last week the lowest level in a year as price swings in foreign exchange declined, encouraging investors to borrow greenback at record low interest rates and buy assets in countries offering yields as much as 8.1 percentage points higher than US deposit rates.

Borrowing costs in dollars as measured by London interbank offered rates fell below those of yen and Swiss francs for an extended period for the first time since 1994 during the past three week. Those carry trades are the most profitable since before 2000, according to data compiled by Bloomberg.

Borrowing dollars and then selling them is adding pressure on a currency that’s already weakened 14% since March as the budget deficit exceeded US$1 trillion, the government sells a record amount of debt and the Federal Reserve floods the financial system with US$1.75trillion to pull the economy out of a recession.

“The dollar is the big funding currency,” said Jonathan Clark, vice chairman of New York-based FX Concepts Inc, the world’s largest currency hedge fund, with USD9bil in assets under management. ‘The reason why people are borrowing the US dollar for cany trade is A: It’s very cheap to fund, and B: The expectation kit’s going to go down.”

London-based Standard Chartered PLC, the most bearish of 45 fims in a Bloomberg survey, predicts the dollar will decline 6% versus the euro by year-end. Deutsche Bank AG in Frankfurt, the most accurate forecaster of the dollar in the first half of 2009 as measured by Bloomberg, is bullish, calling for it to gain 11% by the start of 2010.

Using the world’s reserve currency to fund cany trades became more profitable and less risky last month than with the yen for the first time since March 2008. Bloomberg data show.The difference in Sharpe ratios for dollars and yen, a measure of performance versus risk has averaged 1.35 since May. compared with minus 0.37 since 2004. The higher the Sharpe ratio, the higher the risk adjusted return.

“The way everyone is funding their risky investments is by using dollars.” said Bilal Hafeez, the head of foreign-exchange strategy at Frankfurt-based Deutsche Bank the world’s largest currency trader. “Interest rate between Japan and the US are fairly comparable right now, which is incredibly unusual. Much of the past 20 years or so, the yen has been the funding currency of choice.”

Source : The Star



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