Wed Jan 23 02:31:27 2008 - The U.S. Dollar as a Funding Currency for Carry Trades

U.S. Fed Reserve Chairman Bernanke to cut interest rates further despite cutting the current rate by 3/4s of a percent. Analysts expect another 0.5 cut by January 30th. Foreigners investing in American assets will likely resist investing in American funds due to the lower rates. Nevertheless, American citizens might pump the economy by borrowing on credit since rates will be low in the interim.

The dollar fell against the euro once again based on the above expectation by analysts. Much like Americans, there is likelihood of foreign investors getting funds from the U.S. (with low interest costs) and investing in countries with higher rates, otherwise known as a carry trade.

Source: Lavenant Capital