As FX volatility spikes, funds dump the dollar
By Julie Dalla-Costa
After profitably playing the dollar-yen carry
trade for years, currency traders abandoned this bet in droves
on the summer's uptick in market uncertainty. Instead, they're
shorting the dollar. The return of volatility makes the carry
trade riskier, after all, while the dollar's descent continues
In recent times, with volatility subdued and U.S. interest
rates on the rise, the dollar-yen carry trade was an easy way
to make a buck: Just borrow yen for less than 1%, exchange it
for U.S. dollars and buy any U.S. asset yielding more than the
cost to borrow. Profit depended on two things going right.
First, U.S. asset returns had to stay above the cost to borrow.
Second, exchange rates between the dollar and yen had to remain
at least constant, if not moving against the yen.