Why traders who borrow in euros earn more money than with the dollar
The fall in the Euro came to the rescue of carry traders looking to invest in emerging market currencies. These transactions, where borrowed euros are used to invest in high-yielding emerging market (EM) currencies, have seen lucrative profits of around 29% this year, depending on the choice of emerging market currency, a reported Bloomberg.
What is a Carry Trade? In simple terms, a carry trade can be defined as a trade in which funds borrowed at a lower interest rate are deployed into higher yielding assets to generate returns.
Read also : Alibaba slips 4% on US delisting fears, electric vehicle stocks soar: Key events Hong Kong traders are watching today
The Euro Factor: The dollar is one of the preferred currencies for financing carry trades due to extremely low interest rates in the United States. However, rising US inflation and subsequent Fed interest rate hikes reduced gains in carry trades involving the greenback.
With the 10% drop in the euro against the dollar, it has become an ideal choice for a carry trade.
For example, carry trades involving the euro and Brazilian real provided returns of 28.8% compared to the same carry trade involving the dollar, where returns were 14.8% since inception. of the year, according to Bloomberg.
Expert advice : Brendan McKennacurrency strategist at Wells Fargo in New York, says Bloomberg that financing carry trades by selling euros is becoming more and more common. “The European Union looks more likely to fall into recession, and geopolitical developments should weigh on the currency, making euro-funded emerging market carry trades an attractive option,” he said.