The mayhem that swept across world markets this week was partly caused by a market strategy known as the “carry trade.”.
Currency traders watch monitors near a screen, back, showing the Korea Composite Stock Price Index , top left, and the foreign exchange rate between U.S. dollar and South Korean won, top center, at the foreign exchange dealing room of the KEB Hana Bank headquarters in Seoul, South Korea, Tuesday, Aug. 6, 2024. – The mayhem that swept across world markets this week was partly caused by a market strategy known as the “carry trade.
But the scale of the declines was exaggerated by the rush to sell U.S. dollars due to carry trade deals that had helped drive markets to record levels.Carry trades involve borrowing at low cost in one currency to achieve higher returns from investments in another currency. One of the most recent examples has been to borrow Japanese yen, expecting the currency to remain cheap against the U.S. dollar and for Japanese interest rates to remain low. The borrowed funds would then be invested in U.S.
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