The Dollar Is the New Yen

The world is now so convinced that the U.S. dollar will remain weak that it has become the currency of choice for carry trades. The carry trade is when investors borrow dollars at low rates and invest elsewhere at higher rates in the arbitrage that investment banks and hedge funds love to exploit.

The Financial Times recently quoted Simon Derrick at Bank of New York Mellon calling the dollar is “the new yen.” I think he’s right. Derrick said, “This puts the dollar in exactly the same position as the yen back in 2001 and makes it naturally attractive as a carry trade funding currency.”

After trading in a relatively narrow range over the summer, the dollar was pushed out of its comfort zone last week and dropping to its lowest level for a year on a trade-weighted basis. Some analysts point to this downside breakdown, which has made the dollar more attractive for carry trades and subsequently contributed to its overall weakness.

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