Key Takeaways:
- U.S. Dollar Decline: Between late February and April 3rd, the U.S. Dollar fell 5.1% against other developed market currencies (DXY), partly due to tariff policy impacts.
- Carry Trade Unwind: The popular carry trade strategy—borrowing in low-interest-rate currencies to invest in higher-yielding ones—has unraveled as FX rates moved sharply against those positions.
- Losses Across the Board: Traders faced losses as currencies they were short appreciated, and those they were long depreciated—completely flipping the expected returns and triggering a sharp, painful unwind.
Lost in the focus on the bludgeoning that tariff policy has had on equity markets, is the impact on global currencies. From the end of February through April 3rd, the U.S. Dollar is down 5.1% relative to other developed market currencies (DXY). In addition, we’ve also seen a violent unwinding of the popular currency carry trade.
For those that need a refresher, the currency carry trade looks at interest rate differentials to determine which countries have higher (lower) rates than the home country. In countries with interest rates higher than the U.S., will borrow dollars and pay the U.S. interest rate to purchase that currency and earn the higher rate in that country. Countries with a lower interest rate than the U.S. will be sold short in order to invest in U.S. short rates. As long as FX rates stay stable, the investor earns the interest rate difference.
