Currency carry trade could be next global crisis
May 7, 2010, 12:31 pm TWN
GENEVA -- A top U.N. economist warned Thursday that so-called carry trades — a form of speculation on the currency markets — could sink the global economy back into crisis.
"If you asked me what is the most serious problem in the world now, I would say it's carry trade," said Heiner Flassbeck, chief economist at the U.N. Conference on Trade and Development.
Carry trade involves borrowing in a currency that levies low interest rates, to invest in another which yields higher interest rates. The investor makes a profit from the difference in interest rates.
With currencies across the developed world, such as the U.S. dollar and the Japanese yen all levying low interest rates at the moment, carry traders are borrowing these currencies and investing in those of emerging economies, such as India, which is paying higher interest rates.
"This dramatically destabilizes economies, because (capital) goes from low interest rate countries which are low inflation countries or deflation countries to high inflation countries and appreciates the currency higher," said Flassbeck at a press conference in Geneva.