US dollar carry trade defies ‘Sell America’ woes, trounces the world’s stock market booms
News Summary
Despite earlier market narratives of a “Sell America” trade and a year-to-date decline of about 7% for the dollar in 2025, the US dollar is regaining its status as one of the world's most appealing assets, with a Bloomberg dollar gauge rebounding approximately 3% from its September low. The article highlights that a straightforward strategy of borrowing in low-yielding currencies like the Japanese yen or Swiss franc and investing in dollars is projected to outperform implied returns from European equities and Chinese government bonds, even when accounting for asset volatility. This suggests the dollar's critical role in global portfolios will endure, despite previous concerns spurred by President Donald Trump's economic policies. Tang Yuxuan, a strategist at JPMorgan Private Bank, anticipates the dollar will once again be a high-carry currency, maintaining its strength from both a directional and carry perspective. Furthermore, a sharp drop in the greenback's volatility, partly attributed to a prolonged government shutdown dampening foreign exchange market swings, has boosted the appeal of dollar carry, reducing risks for foreign traders taking unhedged dollar exposure.
Background
A carry trade is a financial strategy where an investor borrows in a currency with a low interest rate and converts it to a currency with a high interest rate to invest, profiting from the interest rate differential. The primary risk in this strategy is exchange rate volatility, where a depreciation of the high-yielding currency can erode or even exceed the interest rate gains. In 2025, the dollar had previously experienced a roughly 7% decline year-to-date, marking its worst performance in eight years, leading to discussions of a “Sell America” trade. This was partly fueled by President Trump's continued disruption of the global economic order, raising concerns about the dollar's future. However, the dollar's volatility has recently decreased, partly due to a government shutdown dampening price swings in the global foreign exchange market.
In-Depth AI Insights
Does the resurgence of the dollar carry trade signal a deeper, structural shift in global capital flows? - The increasing attractiveness of the dollar carry trade likely indicates a global reassessment of risk and reward, leading to capital reallocation towards U.S. assets. - This may not just be a short-term response to interest rate differentials but potentially a renewed recognition of the U.S. market's liquidity, depth, and relative stability amidst heightened global economic uncertainty and sluggish growth in other major economies. - Such a structural shift could result in reduced capital inflows to emerging markets and some developed markets (like Europe) as the dollar's appeal as both a safe haven and a yield-bearing asset strengthens. What paradox exists between the Trump administration's 'America First' policies and a strong dollar, and what are its long-term investment implications? - Superficially, Trump's protectionist and geopolitical strategies could raise concerns about the dollar's reserve currency status, contributing to its earlier decline this year. - However, the carry trade's revival suggests that even under 'America First,' U.S. assets offer relatively higher real yields and lower volatility, paradoxically strengthening the dollar's short-term appeal. - In the long term, if Trump's policies lead to sustained underperformance in other economies or exacerbate global uncertainty, the dollar's safe-haven status could continue to support its strength, creating a 'race to the bottom' where global capital flows to the dollar due to a lack of better alternatives. What are the implications for market transparency and risk management when dollar volatility decreases, partly due to a government shutdown? - Market volatility suppression due to a government shutdown, while seemingly reducing currency risk for carry trades in the short term, represents an artificial, non-market-driven reduction in volatility. - This 'calm' could be deceptive; once the government resumes normal operations or other macroeconomic shocks occur, suppressed volatility could be rapidly unleashed, exposing carry trade investors to significant risks. - For global financial markets, this scenario highlights the deep interference of political risk with market mechanisms and its potential distortion of efficient price discovery. Investors should be wary of such unnatural market states.