Euro Wreaks Havoc on Carry Trades in Rally Almost No One Foresaw
In a typical carry trade, speculators borrow in a currency they expect to depreciate or remain little changed to secure the lowest borrowing costs.
Photographer: Gianluca Colla/BloombergThis article is for subscribers only.
It was supposed to be so easy. Borrow in euros as the European Central Bank kept interest rates near zero and use the proceeds to invest in the economies where rates are higher, pocketing the difference and generating huge profits.
For a while it worked -- that was, until about a month ago when global markets began to go haywire and the euro, instead of weakening as most every strategist surveyed by Bloomberg predicted, began to rally. Investors who embraced the carry strategy have seen losses of 3.5 percent since the end of March, according to a UBS Group AG index.