"A simple strategy of borrowing in low-yielding currencies like the Japanese yen or the Swiss franc and putting your money in dollars looks set to beat the implied returns on markets such as European stocks and Chinese government bonds once the volatility of these assets is taken into account, according to Bloomberg calculations. That suggests the dollar will maintain its critical position in global portfolios, despite worries about its future this year as President Donald Trump shook up the global economic order."
"A Bloomberg gauge of the dollar is down about 7% this year - its worst performance in eight years - but it has bounced back around 3% from a September low, in part because of the so-called carry trade. "The dollar will end up being one of the highest carry currencies again," said Yuxuan Tang, a strategist at JPMorgan Private Bank in Hong Kong. "Whether it's from a directional or carry perspective, it's still going to be about a strong dollar," she said."
Carry trades that borrow in low-yielding currencies such as the Japanese yen or Swiss franc to invest in dollars now offer higher implied returns once asset volatility is considered. Bloomberg calculations show this strategy can outperform markets like European stocks and Chinese government bonds on a risk-adjusted basis. The dollar, though down about 7% year-to-date, has rebounded roughly 3% from a September low partly due to carry activity. Lower dollar volatility, aided by a prolonged government shutdown, reduced hedging costs and encouraged foreign traders to load up on dollar assets, amplifying capital flows and liquidity.
Read at Fortune
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