Is the US dollar carry trade coming back? How it works.
Explore how the carry trade capitalizes on interest rate differences between currencies like the USD and JPY, offering daily returns through leveraged forex positions in stable market environments.
How does the carry trade work in forex?
A carry trade is a trading strategy that seeks to generate daily returns by exploiting interest rate differences between two currencies. Traders invest in a higher-yielding currency, such as the US dollar, and finance this position with a lower-yielding currency like the Japanese yen. The profit arises from the daily interest rate differential between the two currencies. This strategy is popular in the forex market due to its high leverage, allowing traders to control large positions with minimal capital. Carry trades are most effective in stable markets with low volatility, providing consistent, albeit small, daily gains over time.
US interest rates...higher for longer?
Though the Fed has cut rates from their multi-year highs atop 5.5%, interest rate markets are not pricing in as many cuts as previously thought. Fed Funds futures provided by CME Group now project the US overnight rate for 2025 to fall somewhere in the 3.5-4.5% range with more than 75% likelihood, while prior projections had priced in considerable likelihoods that the Fed could move rates below even 3.0% by the end of 2025.
What are US dollar swap rates?
Long US dollar positions have consistently earned a profit from the positive overnight swap rate in multiple major pairs like USD/JPY, USD/CHF, and even EUR/USD - this is an example of the carry trade strategy. Traders can create long USD positions, for example, by buying USD/JPY or USD/CHF or by selling EUR/USD. However, the actual price action of the forex pair can far exceed profits from the carry trade if the US dollar depreciates against the other currency in the pair. Also, if US rates fall by more than rates in these competing regions, or Japanese, Swiss, or European central banks raise interest rates higher than those of the US, then the carry trade can turn into a scratch or negative outcome.
How to set up a carry trade
Traders can find indicative swap rates for 80+ forex pairs live in the tastyfx trading platform. These rates are divvyed up into swap bids and offers - bids being the indicative number of pips a 1 lot short position would be affected by overnight interest rates and offers being the same for long positions in a given forex pair. Traders can look for positive values under the swap bid and offer column to set up positions with a positive carry trade. Liquidity and volatility should also be factored into the carry trade equation, as forex pairs with wide spreads between the bid and offer prices can create large costs to the trade and very volatile pairs can make for large profit/loss swings due to price action. Major pairs like USD/JPY and EUR/USD tend to be more liquid and less volatile than minor or exotic pairs, for example. The profit from the carry trade can be negated, or completely lost, by the underlying position's price movement. Traders should understand the mechanics of a carry trade before participating.
How to Trade US Dollar
- Open an account to get started, or practice on a demo account
- Choose your forex trading platform
- Open, monitor, and close positions on USD pairs
Trading forex requires an account with a forex provider like tastyfx. Many traders also watch major forex pairs like EUR/USD and USD/JPY for potential opportunities based on economic events such as inflation releases or interest rate decisions. Economic events can produce more volatility for forex pairs, which can mean greater potential profits and losses as risks can increase at these times.
You can help develop your forex trading strategies using resources like tastyfx’s YouTube channel. Our curated playlists can help you stay up to date on current markets and understanding key terms. Once your strategy is developed, you can follow the above steps to opening an account and getting started trading forex.
Your profit or loss is calculated according to your full position size. Leverage will magnify both your profits and losses. It’s important to manage your risks carefully as losses can exceed your deposit. Ensure you understand the risks and benefits associated with trading leveraged products before you start trading with them. Trade using money you’re comfortable losing. Past performance is not indicative of future results.