Dol­lar emerges as fund­ing cur­rency of choice: BIS

The Pak Banker - - International3 -

LONDON: Ex­pec­ta­tions of low U.S. in­ter­est rates and one-way bets against the dol­lar saw it emerge as the new fund­ing cur­rency of choice for FX carry trades, the Bank for In­ter­na­tional Set­tle­ments (BIS) said in its quar­terly re­view.

Un­der carry trades, in­vestors bor­row in a cur­rency with low in­ter­est rates to in­vest in high-yield­ing and growth­linked ones or riskier as­sets like stocks and com­modi­ties which gen­er­ate higher re­turns.

Tra­di­tion­ally the yen and the Swiss franc have been used to fund these lever­aged trades, but ex­pec­ta­tions that the U.S. Fed­eral Re­serve will keep rates near zero and re­sort to quan­ti­ta­tive eas­ing led to the dol­lar emerg­ing as the mar­kets' pre­ferred choice be­tween Au­gust and early Novem­ber this year.

"Ap­pre­ci­a­tion pres­sures were stronger for coun­tries with high growth prospects and larger in­ter­est rate dif­fer­en­tials," the BIS said.

"Ap­pre­ci­a­tion was gen­er­ally smaller for the cur­ren­cies of coun­tries that con­tin­ued to man­age their ex­change rate fully or par­tially against the U.S. dol­lar. As a re­sult, ap­pre­ci­a­tion was less pro­nounced in Asia, and China in par­tic­u­lar."

The BIS said the ac­cel­er­a­tion of cap­i­tal in­flows was re­flected in higher stock prices in a num­ber of emerg­ing mar­ket coun­tries and also vis­i­ble in bond prices.

On the other hand, the dol­lar in­dex (.DXY), a mea­sure of the green­back's per­for­mance against a bas­ket of cur­ren­cies, lost more than 17 per­cent be­tween early June and Novem­ber 4 this year as hedge funds, cen­tral banks and oth­ers sold the dol­lar.

It has since re­bounded as in­vestors set aside con­cerns about a slow­down in the U.S. to fo­cus on sov­er­eign debt prob­lems in the euro zone.

The BIS said for­eign ex­change carry trade vol­umes are dif­fi­cult to track due to a lack of data. -Reuters

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