Whipsawed by the greenback and confronted by U.S. policy confusion, carry trades were supposed to be a rare bright spot for investors who want to stay away from the world’s biggest reserve currency. Under the strategy, you borrow in low-rate alternatives such as the yen, and buy high-yielding peers like the Mexican peso, benefiting from low volatility and the emerging-market rally.
Practitioners of the carry trade are learning there’s no hiding from the dollar’s influence. Growing doubts about the outlook for U.S. policy following the failed attempt at health-care reform not only led to a weaker dollar, it also caused investors to pile into havens such as the yen and the euro -- the funding currencies carry traders sell as part of the strategy. The Japanese currency gained 2 percent against the dollar this month, while the euro rose 2.8 percent.
"The carry trade is far more important than the dollar move in the changing the currency market," said Bob Savage, chief executive officer of hedge fund CCTrack Solutions LLC in New York. "The rise in the yen may actually put the trade at risk. The dollar itself doesn’t affect the biggest FX trade out there, but the yen does."
Nonetheless, carry traders could still make a profit because of yield differentials or appreciation in emerging-market currencies
Source Bloomberg
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