Currency Carry Trades

Paper Summary:

In this paper, the author explains what currency carry trades are. He uses the yen as a prime example of a currency carry trade and talks about its lasting period of 3.5 years. The author discusses the highs and lows of the yen and also the dollar, and the reasons behind it. The author explains the logic behind the currency carry trade and how it can happen. The author then proceeds to discuss the interest rate differentials which help to understand the changes in the currency markets. The author concludes with his opinion that if the Euro carry trade is happening now and lasts as long as the yen and dollar carry trades, then the Euro will continue down until sometime in 2008.

From the Paper:

"In fact, from April 1995 to July 1998 the Japanese currency went from 80 to 147 yen per US dollar, a period of 3.25 years and a loss of 66% purchasing power. From August 1990 to September 1995 the Bank of Japan had lowered the Official Discount Rate from 6% to 0.5%. The US 3-month TBill rates were between 5% and 6% and longer duration bonds over 7%. Thus was born the "yen carry trade."Of course this ended sadly in 1998 when the dollar fell by about 9% in the period between August 31 and September 7, 1998 and then by a further 12% on October 7 and 8. That was the end of the yen carry trade."

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