Dollar displaces Yen as carry trade's favourite

26 November 2007

Mumbai: A free fall in the value of the dollar and lower US interest rates combined with the increasing volatility in the Japanese yen and the French franc have made carry trade in US dollar even more appealing to currency traders.

Traders are increasingly using the dollar to pay for purchases of currencies with higher yields, as it is the most profitable trade in the foreign-exchange market.

A basket of currencies, including the British pound, Brazilian real and Hungarian forint financed with dollars yielded returns of 17 per cent this year, compared with 9 per cent for yen-funded and 7 per cent for trades funded by Swiss francs.

The Japanese yen had plunged from a two-year high against the dollar amid a spurt in global stock prices, prompting investors to limit holdings of higher-yielding assets with the yen (carry trade).

The yen, which fell against most major currencies, declined the most against the Australian dollar.

It fell to 108.56 against the dollar in Tokyo morning trade, and was trading at 161.10 against the Euro.