Dollar Carry Trade

Will the dollar carry trade become popular?

Right now, the U.S. dollar is gaining against the euro and the sterling. However, this brief rally may not last, thanks to an improved retail sales outlook. Indeed, this brief respite for the U.S. dollar may only be a precursor the dollar carry trade, which may come into effect if the risk trade becomes more desirable.

Right now, the U.S. dollar has a low yield, and improving economic conditions may mean that the risky carry trade may be ready for a comeback. The dollar would make an ideal funding currency for a carry trade. GFT’s Kathy Lien reports on the possibility of a dollar carry trade in FX360:

The U.S. yield curve has also steepened and, the steeper the curve, the less incentive there is to buy dollars for hedging purposes in the front end. It also becomes more attractive to fund purchases of higher yielding currencies with the U.S. dollar.