According to Bloomberg’s calculation, a simple strategy of borrowing low-yielding currencies such as the Japanese yen or the Swiss franc and investing the funds in the US dollar seems likely to outperform the implied returns of markets such as European stocks and Chinese government bonds, once the volatility of these assets is taken into account.
This indicates that despite the fact that the dollar’s outlook is worrying this year due to President Trump’s disruption of the global economic order, it will still maintain its key position in global investment portfolios. The Bloomberg Dollar Index has dropped nearly 7% this year, marking its worst performance in eight years, but has rebounded by about 3% from its September low, partly due to so-called carry trades.
“The US dollar will eventually become one of the currencies with the highest carry trade returns again,” said Tang Yuxuan, a strategist at JPMorgan Private Bank in Hong Kong. “The key, whether from a directional perspective or a carry trade return perspective, lies in the strengthening of the US dollar,” she said.
Arbitrage trading can trigger large-scale capital flows, reshape asset values, and influence market sentiment from New York to Singapore. When investors borrow at low cost to chase higher returns elsewhere, liquidity is often magnified – fueling rallies in risky assets, but these rallies can also collapse quickly when market volatility intensifies.
The appeal of the dollar carry trade has been enhanced by a significant decline in the volatility of the US dollar, partly due to the long-term government shutdown which has curbed price fluctuations in the global foreign exchange market with a daily trading volume of 9.6 trillion US dollars. This has reduced the risk for foreign traders to buy large amounts of dollar assets without hedging the currency.
As investors worry that the global stock market rally driven by artificial intelligence is about to end, the appeal of arbitrage trading is growing.
The equity risk premium in the US, as measured by the difference between the earnings yield on the S&P 500 and the 10-year US Treasury yield, has turned negative. Assuming that investors finance their investments through short-term borrowing and eventually earn a return in line with the earnings yield, US stocks currently offer no return after adjusting for risk.
Of course, the carry trade in favor of the US dollar is not without risks. A sudden drop in short-term interest rates would significantly erode its advantage.
Tang Jie, the chief investment officer for emerging markets and head of discretionary portfolio management at Deutsche Bank, said, “The US dollar will remain an attractive carry trade asset as the Federal Reserve is likely to be cautious about cutting policy rates in the short term. However, there is uncertainty for next year as the new chair of the Federal Reserve may adjust the pace of rate cuts.”
Technical analysis:
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Gold: After recovering the key level of 4020/40, its performance has been strong all the way, and it has now returned above 4100. For today, we suggest being more proactive in participating in long signals. Follow-up buying and low-sweeping near-term liquidity can be combined for participation. For detailed positions, please consult the plugin.
(Gold 15-minute chart)
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The Nasdaq index: Over the past week, the price has undergone a correction of around 1,600 points. The short-term negative factors have been released, and the subsequent trend is likely to be a further rebound and correction. Pay attention to the performance of the long position signal near 25,450 within the day. For detailed positions, please consult the plugin.
(NASDAQ 15-minute chart)
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Crude oil: The price did not complete the test of the 61 level yesterday. We suggest waiting for a breakout and pullback completion signal within the day, and then execute a long position after confirmation. For detailed positions, please consult the plugin.
(Crude Oil 15-Minute Chart)
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