MONEY The official response to the aftermath of the last bubble in financial markets has been to inflate another. Stocks, bonds and commodities are awash with cash supplied virtually for free by central banks. In particular, big investors are borrowing heavily in US dollars and pumping the money into risky assets. For now, this “carry trade” is working a treat, with risky assets soaring and the dollar tanking. The danger comes when it goes into reverse.
Nouriel Roubini – one of few economists to predict the credit crisis – said this week that the present carry trade is of unprecedented magnitude. When it ultimately unwinds, therefore, we should be braced for carnage. Traders will be forced to sell their positions in risky assets and buy back the US dollar. Going by the experience of previous carry trade reversals, the action is likely to be sudden and dramatic.
Whether or not you trade currencies, therefore, it is worth keeping a close eye on the US dollar index. Elliott-wave analysis suggests its decline is in its latter stages. A decisive reversal between 74.45 and 72.57 could mark the beginning of the coming dollar bull market, which should rapidly take this index above 90 and ultimately much further.
