Euro carry trade?

[Greg Nowell]

It's very common for international investors & traders to arbitrage such
discrepancies.  "In theory" the euro would continue to fall until the de facto
rate of interest would equal the rate of interest offered in the U.S.  "In
practice" such discrepancies can continue for a long time, as there are many
factors which go into making an interest rate.  Certainly for a long time
Japanese investors have found more money to be made n US investments than in
domestic instruments.  But, there are huge risks involved with the shifts int
he currency rate. -gn.

Robert Went wrote:


> Dear LBO-ers,
>
> There have been small reports in the Dutch press that the Central Bank here
> suspects (but has no proof for it) that treasuries of companies borrow lots
> of euro, change them for dollars and buy dollar-bonds, to profit from the
> difference in interest rates and the fall of the euro, and that this 'euro
> carry trade' (already known of the course is the 'yen carry trade') is an
> explanation for the fall of the euro. One newspaper calculated that gains
> for such operations would have been 12% (interest difference plus fall in
> euro exchange rate) during the first 5 months of this year only. Also, this
> week the Wall Street Journal Europe mentioned this as an explanation in an
> editorial.
> It would be interesting to know more about this, because centrale bankers,
> policymakers and 'the market' officially blame the small increase (0.4%) of
> the Italian budget deficit for the euro-slide, obviously to push even
> harder for (pro-cyclical) austerity policies in Italy, Germany and the rest
> of the EU.
> Did anyone know anything about this 'euro carry trade'?
>
> Thanks,
> Robert Went

--
Gregory P. Nowell
Associate Professor
Department of Political Science, Milne 100
State University of New York
135 Western Ave.
Albany, New York 12222

Fax 518-442-5298