Well, shit.

[maradydd]

By way of ernunnos, the dollar is now the currency of choice for carry trades.

Poll

Comments

[barbarienne]

I know I should care, but I just don't have it in me to do so. This falls into the same category as natural disasters. I don't have any ability to stop it from happening, which makes my only options (a) leave the place where it will happen, and/or (b) hunker down and prepare.

Much as I might like to do (a), that is unfeasible at this time, and for the foreseeable future. I'm doing (b) the best I can, but living in a bunker mentality is, imho, far worse than sucking up the shit when it goes down.

Shorter version of the above: "It's always something. If it's not one thing, it's another."

[maradydd]

Sure, there's nothing any of us can do to strengthen the dollar or convince the Fed to raise interest rates on our own, but IMO it's better to know about these things and, as you pointed out, use them to direct one's investment strategies. The absolute worst thing a person can do at this point is sit on dollars. If you're investing at a decent rate of return, that's a good start; note, however, that better rates of return are likely to be found outside the US.

"If you can't beat 'em, join 'em" is actually a viable strategy if you have the time and spare cash to get into forex. I'm thinking about sleeping less and running some simulations to see whether the strategies I've used for options (all with play money, alas) work for forex. Probably won't need the data-mining component, since the forex space is smaller, but I bet the math works the same.

[barbarienne]

::blinks in confusion:: (Apparently my reading-comprehension circuits are still cold this morning.)

Does that translate into "invest in foreign companies rather than USAian"?

I'm sitting on a modest pile of dollars at the moment because I hope to turn them into a house-purchase in the next 6-to-12 months (sooner if at all possible). I'm reluctant to release those into a market currently teetering in wild fluxes.

My 401(k) and 403(b) accounts are heavily stock-invested, about 40% in foreign stocks.

Idle question considers the wisdom of switching to "drive"

[vatine]

So, at the moment, it's the carry trade that keeps the dollar exchange rate up (in that the carry trade keeps dollars out of FOREX)? The idle question has a second component, if the carry trade stops, what are the chances of a dollar crash before other mechanisms can step in and prop the dollar exchange rate up?

Would setting the standard price of oil in Euros, British Pounds or Swiss Francs change this substantially?

I initially wrote the standard prince of oil, but it was not amusing enough to leave in, although mentioning in an aside seems to have been done.

Re: Idle question considers the wisdom of switching to "drive"

[maradydd]

"Out of FOREX" is kind of a weird way of putting it, since the whole point of a dollar carry trade is doing your FOREX transactions in dollars instead of euros or NZD or whatever (because in FOREX you're going to have some currency sitting idle for brief periods of time, and you want that to be a low-interest currency). The dollar's actually fallen against most major currencies in the wake of this IMF announcement, but I think you're right that using it as a carry instrument is keeping it from falling farther -- if people are going to buy dollars to use them as a common currency for FOREX transactions, they want those dollars to maintain some buying power from one day to the next

Re: Idle question considers the wisdom of switching to "drive"

[vatine]

Well, being part of the carry trade would, sort-of (if I've read and reasoned correctly) that it tends more towards sitting around for MUCH longer than normal FOREX trades.

I have a vague recollection of OPEC discussing setting their barrel prices in Euros, a year or two ago, don't know if anything ever happened about it.

[jrtom]

Disclaimer: this is the first time I've seen the phrase "carry trade", i.e., I don't know anything about this subject.

That said: the wiki you pointed to indicated that the dollar (and the yen) has been big in this kind of transaction since the 90s. What, exactly, has changed? Not so much yen, more dollar, or something more qualitative?

[feonixrift]

If I'm reading right, it's largely about the direction of the trade. Acquiring (low interest) yen to fund (higher return) investments in countries like the USA was the Big Thing for a while. Now, unless I misread, they're talking about acquiring (low interest) USA dollars to fund (higher return) non-USA investments.

[maradydd]

feonixrift got it in one.

[barbarienne]

I got all of four questions wrong on my SATs, but they were all in the reading comprehension section on a passage about economics. Which is to say, I really need the "For Dummies" translation here.

So, questions from the ignorant:

Is this situation accurately summed up as, "People are borrowing $ from the USA at interest rate X, and then investing this $ in things that give return of rate Y, where Y > X"?

Which leads me to the follow-up question: Why isn't the USA investing in those things directly, and getting back returns of Y?

I think if I can understand the follow-up question here, it might help me understand why this is a big problem.

[xthread]

Well... it's been looking for a while like Bush and the Bernanke Fed had successfully smashed the Dollar as the Global Reserve Currency. If we've become the primary carry-trade currency, I'm not sure that that's a bad thing. It seems like it would just extend the several percent of interest-free loan we've been getting from the rest of the first world.

[maradydd]

I don't follow your logic here. The dollar is now in the position that the yen was in for most of the 1990s, back when the Japanese were merrily extending interest-negative loans to anyone who came calling. The only major difference is that the dollar still carries a positive, though small, interest rate.

[xthread]

Let me start at the top, then