Forex rebates on every trade - win or lose!

Charts look great Hils,

Definately think daily calendar needs to be in the header as well though.

NEW YORK (Dow Jones)--Low U.S. interest rates won't be enough to make the dollar the prime funding currency for the most notorious of foreign-exchange strategies, the carry trade.

With the Federal Reserve's benchmark lending rate at 2.25% and expected to dip even farther in coming months, talk is emerging of the greenback rivaling the yen and maybe replacing the Swiss franc as a funding currency.

But uncertain market conditions, characterized by rapid swings in exchange rates, speak against large-scale use of dollar loans as the vehicle for speculative investments in higher-yielding assets outside the U.S.

While interest rate differentials are the crux of the carry trade, other factors have to be in place for it to yield a profit. Low volatility in the funding currency is also key, said David Gilmore, a partner at Foreign Exchange Analytics.

That means the dollar's exchange rate and the yield in the target asset have to catch a steady trend. Ideally, the dollar should decline and the value of the target asset should rise to maximize profit.

That's what happened back in the latter half of the 1990s, except the yen was the funding currency because Japanese lending rates were close to zero. Vast sums of yen were borrowed to invest in U.S. paper. With the greenback appreciating at a 20% clip some of those years and U.S. stock markets booming, carry traders realized huge profits.

Or more rightly said, they made a lot of money if they got out in time.

In the autumn of 1998, the yen-financed carry trade crashed with the impact of the Tunguska Event and left an enormous crater in the financial world's landscape. The Russian debt default in August 1998, and the subsequent near-collapse of the Long-Term Capital Management hedge fund, had darkened the outlook for the dollar. The U.S. currency plummeted early in October as the yen rallied after a surge in the Tokyo stock market.


Speculators Scrambled In 1998

Speculators scrambled to unwind dollar positions and buy yen to pay off their Japanese loans. In the equivalent of a going-out-of-business sale, sellers took what they could get as the dollar/yen rate gapped lower. Over a four-day period, the dollar made huge swings between Y135 and Y111.

A lot of hedge funds and other speculators weren't just burned badly between August and November of 1998 - they were vaporized. Some of the survivors who tried to recoup losses by going short on gold the following year went under when the price of the yellow metal suddenly rallied.

For many months after that, carry trades verged on the edge of extinction, living a precarious existence deep in an isolated corner of the financial jungle. There were a few exotic variations that thrived very quietly, but nothing like the dinosaur-sized leveraged positions involving billions upon billions of dollars that existed prior to October 1998.

The carry trade did make a comeback, though. In 2001, the Fed began trimming its benchmark rate, which eventually bottomed out in 2003 at a 45-year low of 1%. In 2002, the dollar started a long-term slide that hasn't yet ended.

Investors with more appetite for risk resumed borrowing low-interest currencies such as the yen and the Swiss franc to finance the purchase of higher-yielding assets. There was a lot of talk back then about the dollar becoming a funding currency, yet it never happened on a broad scale.

Certainly some speculators took out loans in greenbacks to park them in higher-yielding assets, but the possibility of a sudden dollar rally - or a corresponding slide for the target currency - deterred carry trades of the magnitude seen in the late 1990s.

And if markets needed a refresher on how fast carry trades can go bad, they got it in 2006. The February-to-March turmoil in Icelandic markets that year can largely be blamed on the unwinding of carry trade. Speculative players, such as hedge funds, had borrowed mostly in yen but to some degree in dollars, to invest in Iceland.


Iceland A Reminder Of Carry Trade Dangers

Iceland had become a particular favorite of carry traders because its benchmark rates were above 10%, the economy was booming and its currency as well as Icelandic equities were appreciating robustly. But when sentiment turned and the once-daring investors began rushing for the exits all at once, the krona and Icelandic equities had nowhere to go but down.

Fluctuations were severe in the short run. The krona fell by 7% in two days and by more than 15% in a month as financial companies and banks sounded warnings about risk in Iceland. So today, with Icelandic benchmark rates around 15%, that episode serves as a reminder of how quickly things can change.

According to the latest statistics from the Basel-based Bank for International Settlements, the dollar is still on one side of 88% of the world's currency transactions. That makes it very difficult for stable dollar trends to develop and undercuts the utility of the greenback as a funding currency.

Moreover, Gilmore of Foreign Exchange Analytics points to other factors acting against the dollar assuming the mantle of a funding currency. Markets are generally unsettled and that's never a good environment for the carry trade, as reversals can come on rapidly and without warning. Analysts are still debating whether the dollar has finally reached a long-term bottom and will show convincing signs of a turnaround in the near future. That would be fatal for carry trades funded by dollars.

In addition, with all the attention on the credit crisis, U.S. banks may be less than willing to loan money for carry trades. Taken together, there's little indication that the conditions are right for the dollar to assume the role of a funding currency. Investors sitting on piles of greenbacks may choose to place them in non-dollar-denominated assets in hopes of better returns, but that type of strategy doesn't involve a loan, so it's not a carry trade.

Looking better all the time, Hil :)

Very nice header, Hil, I like it. A tad wide for my laptop screen, but it's OK on my 22 incher.

For some inexplicable reason, the scripts for the chart and rates keep causing my web editor (FrontPage) to freeze, chocopops, so it's becoming a bit of a problem.

I'll keep at it.

Interesting, MM, I can play about with the widths easily enough.

I haven't the first clue how you do that stuff - so well done you!

Looking very good Hil, might need the rates below the chart. OK on my lappy but not sure some of my desk screens will cope.

Hils
Dont you have some ironing to do

OK. I've reduced the width a bit. It needs tidying up, but is it better or does it need reducing further?

Absolutely fine thanks.

I've tidied it up a bit.

The table is now set at 900 pixels wide and I've reduced the width of the rates to make the chart as wide as possible. Will that suit everyone's screen settings?

The other thing that I can do is change the time frame of the chart.

At the moment, I've plumped for a cable chart set at 5 minute. What do people want as their default?

Think 5 minutes is spot on.

Looks great now Hil. 5 min fine

EUR USD lower highs, lower lows M5?

V. cool, Hil, works great on my 1024x768 laptop. Cable's the chart for most folks I would think.

All-in-all, a very sexy bit of stuff -- although I would expect nothing less from you Hil ;-)

Or maybe not! (EUR USD)

Fingers crossed that I've got to the bottom of FrontPage crashing. I'm in the middle of a 108mb download of Service Pack 3 for MS Office 2003. The revamped header should (hopefully) be up and running later today.

I thought these things were meant to download automatically themselves. I've done a Microsoft Update and it's found loads of updates to install.

Hil, FWIW, your new header also works on an iPhone.