Tuesday, November 17, 2009

More on the U.S. Dollar carry trade

Paul Kasriel believes that proponents of the dollar carry trade hypothesis do not have much evidence on their hands:
There is a lot of chatter that global speculators are borrowing greenbacks at bargain basement interest rates and buying higher-yielding assets denominated in foreign currencies. Some have suggested that this dollar-carry trade is creating yet another asset-price bubble. Other than the fact that the U.S. dollar has been depreciating on a trade-weighted basis in recent months, where is the evidence for this dollar-carry trade? In other words, where is this alleged massive bubblicious U.S. dollar credit creation showing up? I will tell you where it is not showing up – on the books of U.S. commercial banks. In the 26 weeks ended October 28, 2009, loans and investments at U.S.- domiciled commercial banks have contracted at an annual (Devil’s) rate of 6.66% (see Chart 1).
Two remarks here: first, the fact that total loans are contracting does not mean that loans for carry trade purposes are contracting as well. It could mean that loans to the non-financial sector are contracting at an even lower pace than that of the total figure. Second, the top U.S. banks hold large amounts of FX and FX derivative exposure (see Reggie Middleton, subscribtion required). Some of this exposure may be off-balance sheet and thus may not appear in the Federal Reserve figures used by Kasriel and be a part of the carry trade story.

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