The dollar is regaining its crown as one of the world’s most appealing assets, defying talk of a “Sell America” trade that had raised troubling questions about the outlook for the global reserve currency.
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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 almost 7 per cent this year – its worst performance in eight years – but it has bounced back around 3 per cent 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 Tang Yuxuan, 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.
The implications of the dollar’s renewed appeal for investors cannot be overstated for global markets.
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Carry trades can drive massive capital flows, reshaping asset values and influencing sentiment from New York to Singapore. When investors borrow cheaply to chase higher returns elsewhere, liquidity is often amplified – fuelling rallies in risky assets that can just as quickly unravel when volatility spikes.
The appeal of dollar carry has been helped by a sharp drop in the greenback’s volatility, in part because a prolonged government shutdown dampened price swings in the US$9.6 trillion-a-day global foreign exchange market. That reduces the risk for foreign traders loading up on dollar assets without hedging their currency exposure.
