The Economist examines the death of the carry trade and the reasons behind the recent rise of the US dollar versus other currencies.
- Most currencies yield virtually nothing.Although that is true in nominal terms, there is still a difference in real yields. America is now officially in deflation so real yields on Treasury bonds are around 3%. That compares well with real yields in Japan, Canada and Britain and it may be attracting capital flows into the dollar.
- The credibility of economic policy. In America the authorities have shown themselves willing to try everything to boost the economy. The European authorities have been more cautious. Running budget deficits and printing money tend to weaken a currency …But it may be a sign of the severity of the crisis that currency traders are willing to ignore
- Most plausible reason appears to be that currencies are being driven by risk appetite
Emerging-market currencies have rallied alongside equity markets in recent weeks. And it makes a certain amount of sense. If rising stockmarkets are a sign that the world economy is stabilising, then export-driven emerging markets should be the first to benefit.
