Goldman Sachs is asking whether the US dollar is set to become a major funding currency for the carry trade. Perhaps, if US rates drop to another percentage point to 3.75 percent or lower, was the answer in a note on Friday.
The US investment bank reckons that interest rate differentials alone are not sufficient to identify a currency that can be borrowed to fund investments in higher-yielding ones. As well as rate differentials an element of volatility should be included when gauging what are the risk rewards for carry traders, it said. So Goldman looked at results for a portfolio of high-yielding currencies such as the British pound and Australian dollar funded by the US dollar and adjusted the results to incorporate volatility.
It then did the same thing, without volatility, but with the funding currencies being the Japanese yen and Swiss franc, which have been the carry traders' choice for the past few years. The results showed that the yen and Swissie still won out, but only if US rates stay at their current 4.75 percent. "It would take US rates at 3.75 percent ... for carry traders to be indifferent between funding this hypothetical basket in USD and CHF," it concluded.