The Dollar Carry Trade

Forget about the worry over tires. China now has to worry that the currency backing their investments is being treated with all the respect due toilet paper. It's no longer about the Yen carry trade. It's so passé'. What's now en vogue is the US dollar carry trade, where investors can borrow dollars and purchase assets in other countries and earn a much higher yield. According to Bloomberg, the three-month London interbank offered rate for dollars, a benchmark for about $360 trillion of financial products, fell last week to an all-time low of 0.299 percent, compared with 0.366 percent for the yen.

I wonder if Treasury Secretary Geithner or Banana Ben are concerned that the world's reserve currency is now the "Red Headed Step Child" of global currencies. The dollar is now trading at its yearly low as the need to cling to the dollar as a safe haven diminishes and its funding costs are the lowest on the planet.

Now with the release of the CPI and PPI, inflation fears should be front and center. If the rate of inflation continues to increase, it makes the idea of borrowing dollars much more attractive. Because as the real interest rate is falling, when it comes time to close out the trade, you'll need less foreign currency to pay back the loan.

So while the rest of Wall Street concentrates on the decline of Year over Year Consumer Prices, gold prices continue to climb and give a clear indication that future inflation will soar. The question I have for the Administration and investors is; can the world's reserve currency survive while it is viewed as the world's preferred currency to short.