How far will the USD carry trade go?

The combined efect of zero Fed funds rate, quantitative easing, credit easing and massive purchases of long term debt instruments by the US government is resulting in a boon for the USD carry trade and boosting highly leveraged global asset bubbles.

However, if the dollar reverse and start to appreciate, this popular leverage trade will result in a stampede of investors to close their risky asset positions across all global asset classes to cover the short USD position.

This can happen as a) the USD will have to stabilise at some point; b) Fed's asset purchase plan will have to end and volatility will rise; c) US GDP growth may start to accelerate leading to raising of interest rates; d) Global economic worsening resulting in flight to safety of the USD; and e) coordinated intervening of the USD depreciation by emerging economies.

Eric Tan,
London