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 unabated.
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.