An American dollar bills are shown in this photo set in Toronto, October 22, 2008.
Credit: Reuters/Mark BlinchBy Gertrude Chavez-DreyfussNEW YORK | Thu 28 april 2011, 1: 58 pm EDT
NEW YORK (Reuters)-Americans cheap money spigot remains open and the current is just as fast as ever, which means that the world had better brace for higher oil, metals and food prices and a weaker dollar.
The clear message from the Federal Reserve Chairman Ben Bernanke on Wednesday was that the US Central Bank would keep interest rates exceptionally low and easy monetary policy as it continues to try to revive the u.s. economy back to health.
For investors he offered further encouragement to keep borrowing in dollars, virtually nothing pay and then those dollars in higher-yielding currency exchange and using it to buy oil, metals and food futures and options.
These so-called "carry trade" has become the trade du jour, especially with the steep fall of the dollar of approximately 10 percent of the peak in January.
By comparison, U.S. crude futures are up 23 percent so far this year and the Thomson Reuters-Jefferies CRB index, a general index of raw materials, is 10 percent.
"The greatest risk now is that Bernanke's looseness the unintended consequence of tree-goes-bust creates, where easy-money-driven asset bubbles implode and trust is therefore sucked out of the economy," said JR Crooks, chief of research at investment advisory firm Black Swan capital in Palm CityFlorida.
"It's one thing to have a coin on the decline; It's another thing to have on the decrease of GDP. "
The "carry" trade tack is akin to the still popular yen carry trade, where the yen on Japan's near zero interest rates for the purchase of other higher yield securities such as treasuries borrow. Investors borrow money in currencies as the dollar for finance in markets with higher yields purchases or currencies with potentially higher returns.
The Barclays ' G10 carry excess return index shows that borrowing in low yield currencies like the dollar and buying the ones with a high interest rate if the Australian dollar is generated returns of about 37 percent since the end of the financial crisis in early 2009.
"The Fed seems in no hurry to tighten monetary policy. So if the rates remain low, why would the dollar does not have the financing currency? "said Thomas Stolper, chief currency strategist at Goldman Sachs in London.
"And as you know in foreign currencies, it is all about the differences between countries and in that respect, that difference is negative for the dollar," added Stolper.
The yield differential continues to weigh against the dollar, particularly against the euro, Australian dollar, and some emerging market currencies, whose central banks have started to raise interest rates.
Record low U.S. rates from 0 to 0.25 percent, a huge supply of liquidity under the Fed purchases of more than $ 2 trillion of Treasury and mortgage bonds, and improving the economic prospects in emerging markets have investors to borrow from the lower yield dollars in carry trades in the past 18 months.
A rough estimate of Pi economy investment advisory firm in Stamford, Connecticut, showed that the Fed easing may have sparked dollar carry trades of more than 1 trillion dollars, based on u.s. financial institutions net foreign asset positions.
On Wednesday, the dollar slid to a three-year low of 73284 as measured by the Intercontinental Exchange the dollar index, of approximately 10 percent of the peak in January. Many traders expect the index to fall by the low point, hit in July 2008, from 70698.
ALTERNATIVE
For some investors continues using the dollar in carry trades the only feasible alternative to other low yield currencies like the yen and the Swiss franc.
While the yen an interest rate of zero, as the dollar, the Japanese currency would strengthen the economy in a recession. Since Japan has large overseas investment, would be a recession prompted a repatriation of domestic investors save money, boosting the yen.
The Swiss economy is much better in shape than the United States and a rise in inflation could also prompt the Swiss National Bank to raise interest rates, like the European Central Bank at the beginning of this month.
That leaves the dollar as the only other option left to Finance investors penchant for taking risks.
"Nobody really thinks that the Fed hike rates significantly ... She would like to keep rates low because the recovery is strong, "said Pablo Frei, a portfolio manager and senior analyst at Quaesta Capital, a Zurich-based fund of funds focused on currency managers, with assets of approximately $ 3.5 billion.
Frei said that although the dollar under a big short hedge funds, "people have become more wary of the risk of the dollar" carry, "given how crowded this trade has become.
He added that the fund managers he tracks have lowered their short position on the dollar, although the lower dollar bet their greatest exposure continues.
If in a busy trade there is always the risk of a squeeze as soon as things sour, which can lead to a massive unwinding of carry trades and the potential for huge losses for those slow to get out. When global stocks falling, or when the barometer risk skyrockets, investors tend to repatriate funds, close out losses carry trades and buy back shorted currencies they had.
This happened in 2008 during the global financial crisis and could well happen again.
(Additional reporting by Jennifer Ablan and Steven c. Johnson; Edit by Dan Grebler)
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