[Marxism] The dollar carry trade (Was: How to Tell When the Market is Topping)

Marv Gandall marvgandall at videotron.ca
Wed Oct 21 21:03:21 MDT 2009


Artesian writes:

> From the Financial Times of 19 October:
>
> Russian plans to raise $18bn with international bond
>
> Russia is to launch its first international bond in a decade to bolster
> its
> public finances and take advantage of the surge in demand for emerging
> market debt.
> ____________________
>

> One other point. Despite all the sound and fury about dumping the dollar,
> please note that this issue is denominated in dollars--not euros, yen,
> yuan,
> rubles, rupees, BRICs, SDRs, Virtual trading currency, bahts, bolivars,
> pesos, drachmas, ounces of gold, etc. etc. etc.
===========================================
I suspect this move has less to do with Russian public finances and more to
do with the falling US dollar and it's increasing role as a funding
currency. It's not just the Russian government which has opted to borrow
dollars. Germany recently announced it's first USD bond issuance in four
years and Switzerland, which is running the largest fiscal surplus in the
West, is doing likewise. Venezuela, Belgium, and Spain are other countries
which come to mind as having this year floated or announced plans to to
float dollar-denominated bonds.

Welcome to the dollar carry trade.

You remember the Yen carry trade. Wall Street banks, other global banks and
big institutional investors - even small investors in Japan betting against
their own currency - were borrowing depreciating yen at near zero interest
rates and turning an easy profit by investing them in US and other
higher-yielding currencies and assets.

Now we have Wall Street banks, other global banks and big institutional
investors - even small investors in the US betting against their own
currency - all borrowing depreciating dollars at near zero interest rates
and turning an easy profit by investing them in higher-yielding Australian,
Brazilian, Indian, European, and other currencies, as well as in gold and
oil on expectations these currencies and commodities will continue to rise
against the falling dollar as the Fed, like the B of J previously, engages
in quantitative easing and keeps interest rates on hold.

The Russian and other governments can play this carry trade by issuing
dollar-denominated notes and bonds and swapping these dollar borrowings back
into their own and other rising currencies, both eliminating currency risk
and in the expectation that they'll be paying back the interest and
principal on the USD bonds in cheaper dollars as they continue to
depreciate.

So far this year, it's been a profitable trade. The dollar has fallen
sharply against most currencies except those pegged to it. The ruble hasn't
risen as spectacularly against the USD has the the Aussie dollar or the
Brazilian real, but it is up more than 10% in line with the rise in the
exchange rate of the Canadian loonie and even of the yen, Swiss franc, and
euro in other low interest rate environments.

Of course, another financial shock could see a rush back into the dollar as
a "safe haven", in which case the unwinding of the dollar carry trade will
likely prove even more painful to investors and destabilizing to the world
economy than was the unwinding of the yen carry trade last year.

Which has got the BIS and the world's central bankers worried and warning
about it .






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