Carry traders reeling from dollar surprises look elsewhere

NEW YORK: Carry traders blindsided by bouts of dollar strength are looking beyond the currency to fund their bets - even if it means giving up some returns.

Borrowing dollars to buy assets in higher-yielding currencies, a usually profitable strategy in emerging markets, proved loss-making in the first quarter as US yields surged.

That pushed money managers including Fidelity International and AMP Capital to cut dollar-short positions and fund their arbitrage with euro or yen, given the low interest rates in those currencies.

While that helped traders protect their carry returns, it also underscored the need to have a broad basket of funding currencies to tide over dollar volatility.

Now, even as the dollar weakens again and Treasury yields moderate, they continue to finance part of their emerging-market investments with other currencies.

“Having a diversified basket of funding currencies against emerging-market long carry positions has the advantages of lower risk and an overall better Sharpe ratio on the trade versus one that’s funded solely out of the US dollar, ” said Nader Naeimi, the head of dynamic markets at AMP in Sydney.

“I am happy to stick with a diversified basket.”

A Bloomberg index of carry-trade returns from eight developing-nation currencies, funded by short positions in the greenback, fell 3.1% in the first quarter, the first decline in a year. — Bloomberg

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