[Jason_Lim]

The carry trade is back and it is premised on borrowing Dollars instead of JPY. It is worth noting that in the past the JPY carry trade was largely in the derivative market - fx forwards-the original derivative - with traders treating JPY as the funding leg for forward contracts in the higher yielders. Occasionally we would get a market commenter who would say that the carry trade was a "myth" because nobody really went out and raised JPY to buy other assets. They were right, as far as it went, but it mostly showed that they didn't really understand currency markets. It was and is much harder to borrow JPY directly as the Japanese banks, ubiquitous in the 1980's all retreated to home ground.

Now though, the Dollar is the funding currency for cross-border opportunities and it truly is a "borrow Dollars - sell them - and buy higher yielding assets" trade, with everyone participating. Every bank in the world has the machinery to lend in Dollars. The Republic of Italy borrowed Dollars last week and only 10 percent was swapped. Typically the swap is at least 50% of the notional. Everyone wants to run a Dollar liability. This is going to be the "bubble trade from Hell."

Borrowing Dollars is going to work very well, until it doesn't. With the Dollar weakening gently and everyone reassured about the lack of risk, more and more bystanders will be drawn in. When the last guy levers up, someone will yell "fire" and the rush to cover Dollar short positions will make the sub-prime loan debacle look like the small potatoes that it really was. We will see a reprise of last year's flight back into Dollars.

But there a a great many loans to write between now and then. This is likely to be a multi-year phenomenon. The more successful it is, the more companies and countries will get on board. And the more institutions will be swept over the side.