Dollar carry trade could soon be all the rage

Aug 16 (Reuters) – Being safe the dollar is one of few carry trades that might appeal in currently uncertain times, and with the buoyancy of stock markets and quieter markets supporting risk taking and therefore interest rate plays, demand for dollar could rise.

The interest rate gap between dollar and other major currencies, which is already 2.5% percent or more, will certainly widen further versus yen if Japan’s central bank holds super easy policy, and is unlikely to close versus euro or Swiss franc this year.

Those who invest in dollars and hold that position until the end of this year receive 100 pips versus EUR and CHF or 150 vs JPY. There is FX risk associated to any carry trade but volatility for major FX pairs has dived, suggesting a quiet period ahead.

Liquidity is deep for these pairs too, so positions can be turned quickly if needed while those who enter trades during bouts of dollar weakness should see profits enhanced. One such dip has just occurred with EUR/USD snapping back towards 1.01 after rallying over 1.0300, and USD/JPY almost 135 after approaching 130.

There will likely be similar opportunities to invest in dollars but dips may become shallower if the carry trade becomes fashionable.

(Jeremy Boulton is a Reuters market analyst. The views expressed are his own.)