Americans' cheap money spigot remains open and the flow is as fast as ever, meaning the world had better brace for even higher oil, metals and food prices and a weaker dollar.
The clear message from Federal Reserve Chairman Ben Bernanke on Wednesday was that the US central bank intends to keep interest rates exceptionally low and monetary policy very easy as it continues to try to inflate the US economy back to health.
For investors, he offered further encouragement to keep borrowing in dollars, paying virtually nothing and then swapping those dollars into higher-yielding currencies or using them to buy oil, metals and food futures and options.
This so-called "carry trade" has become the trade du jour, particularly with the dollar's precipitous drop of around 10 percent from its peak in January.
By comparison, US crude futures are up 23 percent so far this year and the Thomson Reuters-Jefferies CRB index, a global index of commodities, is up 10 percent.
"The biggest risk right now is that Bernanke's looseness creates the unintended consequence of boom-goes-bust, where easy-money-driven asset bubbles implode and confidence is consequently sucked out of the economy," said JR Crooks, chief of research at investment advisory firm Black Swan Capital in Palm City, Florida.
"It's one thing to have a currency on the decline; it's another thing to have GDP on the decline."
The "carry" trading tack is akin to the still popular yen-carry trade, which involves borrowing yen at Japan's near-zero interest rates to purchase other higher-yielding securities such as Treasuries. Investors are borrowing in currencies like the dollar to fund purchases in markets with higher yields or currencies with potentially higher returns.
The Barclays' G10 carry excess return index shows that borrowing in low-yielding currencies such as the greenback and buying those with high interest rates like the Australian dollar has generated returns of about 37 percent so far since the end of the financial crisis in early 2009.
"And as you know in foreign exchange, it's all about differentials between countries and in that respect, that differential is negative for the dollar," Stolper added. For more, please see:
The yield differential continues to weigh against the dollar, particularly against the euro, the Australian dollar, and some emerging market currencies, whose central banks have started to raise interest rates.
Record low US rates of zero to 0.25 percent, an enormous supply of liquidity under the Fed's purchases of more than $2 trillion of Treasury and mortgage bonds, and improving economic prospects in emerging markets have prompted investors to borrow the lower-yielding dollar in carry trades over the last 18 months.
A rough estimate from investment advisory firm Pi Economics in Stamford, Connecticut, showed that the Fed's easing may have fuelled dollar carry trades in excess of $1 trillion, based on US financial institutions' net foreign assets positions.
On Wednesday, the dollar skidded to a three-year low of 73.284 as measured by the Intercontinental Exchange's dollar index down around 10 percent from its peak in January. Many traders expect the index to fall through the all-time low, hit in July 2008, of 70.698.
For some investors, using the dollar in carry trades remains the only feasible alternative to other low-yielding currencies such as the yen and Swiss franc.