Currency traders utilize foreign currencies and currency exchange traded funds in a number a ways. One of the more popular way of gaining a profit through currency trading is by betting on “carry trade.”
Traders engage in carry trade by selling currencies of countries with low interest rates while buying currency of countries with higher rates, writes Jeff D. Opdyke for The Wall Street Journal. However, potential currency investors should know that currency values are volatile, and since currency trading typically involves heavy financial leverage, carry trade can result in steep losses.
The logic behind carry trade is that, over time, high-interest rate currencies will appreciate against low-rate currencies. For instance, the most popular trade of the day involves selling the low-yielding U.S. dollar and buying the high-yielding Australian dollar. Essentially, a trader who builds a position in the Australian dollar borrows the U.S. dollar at U.S. rates and gets paid at a higher Australian rate.
The carry trade is tricky, which is why ETFs may be an appealing option for many investors who don’t have the time, energy or stomach for the foreign exchange. The two funds below use strategies similar to the carry trade in a convenient, low-cost, transparent format.
For more information on world currencies, visit our currency category.
- PowerShares DB G10 Currency Harvest (NYSEArca: DBV)
- iPath Optimized Currency Carry ETN (NYSEArca: ICI)
Max Chen contributed to this article.