Monday, March 17, 2008

Now The U.S. Dollar is the Carry Trade Vehicle

The combined effect, of the current credit crisis and the continual lowering of the Federal discount rate, now at 3.25% from 3.50%, has lowered the value of the Dollar against major currencies. While this is the dark cloud facing U.S. economy, there is a silver lining: Carry Trade.

Benefits Of the Current U.S. Economy
FX Exchange: For U.S. Business with major global presence: since their sales are occurring in stronger currencies, they will realize a positive FX exchange, which will help their revenue figures.


Borrowing Cost Lower In The U.S.: While people are bemoaning the rising cost of borrowing, some citing GE, which sold the 4.875% 5-year bonds last week at a yield 1.29% higher than similar-maturity government rates, they are forgetting that the overall borrowing cost is still lower than other major countries[i]:

For example, according to Bloomberg, the current bank rate in Germany is at 4%, in the UK it is at 5.25%, and in Australia it is at 7.25%. Japan is the only major economy country with lower interest rate than the U.S. However, the cost of the Yen has risen dramatically.

The Silver Lining
So, credit worthy companies seeking lower borrowing cost can still tap into the U.S. banks to borrow at a lower overall rate than in other major economy countries. Additionally, if the company is U.S. based, then there is the added boost of reporting revenue in dollars. Therefore, all earnings in Yen, Euros, and Pounds will show higher revenue when converted to dollars.

The banks are not lending you say? Not true. Banks are still lending. However, their lending parameters have tightened substantially. But, if you are a credit rated company with solid balance sheet, the lending spigot has not been turned off.

While the mood in the U.S. is dark and gloomy, look forward to the days when the U.S. companies begin to report higher revenue and profit driven by the lower cost of borrowing and the declining value of the dollar.

Ed Kim

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