Loading ...Back then–everyone was shocked–on all the Biz channels-as to why gold was going down in a financial meltdown-when paper assets were crashing and burning…This is from ZH yesterday–it’s the same old “virtuous circle” for U.S. denominated paper assets–they are as “good as gold”–one should consider himself lucky to own even a single share….and clutch it to his bosom….pretty neat trick “they ” have pulled off…
From Zero Hedge
Regarding item #2 (the US Dollar carry trade), there are over $9 trillion in borrowed US Dollars sloshing around the financial system. These are effectively US Dollar (shorts) as when you borrow in one currency to fund a carry trade you are effectively shorting that currency.
US Dollar deposits yield 0.25%. The Yen yields 0.001%, while the Euro yields negative 0.2% and the Swiss Franc yields negative 0.75%.
In simple terms, the US Dollar is extremely attractive as a store of value relative to most major world currencies. This is why capital has been flowing into the US Dollar, pushing the US Dollar to a 10 year high.
The flip side of this is that every upward move the Dollar makes against other currencies puts more pressure on the $9 trillion worth of US Dollar carry trades. This is why the US Dollar’s rally has been so aggressive: because much of it was carry trades blowing up forcing traders to cover their US Dollar shorts.
On that note, the US Dollar is currently breaking out against most major world currencies.
This is already a big enough concern that the Fed has been mentioning it in FOMC communiqués. Any rate hike will only INCREASE the interest rate differential between the US Dollar and other major world currencies… which in turn would drive even more capital to the US Dollar… and put even more pressure on the $9 trillion US Dollar carry trade.