Carry Trade

Definition

A carry trade is a financial strategy in which an investor borrows money in a currency with a low interest rate and invests it in assets denominated in a currency with a higher interest rate, profiting from the interest rate differential. Carry trades are significant in geopolitics because they create large cross-border capital flows that can inflate asset bubbles in recipient countries and create currency instability when positions are unwound rapidly. The Japanese yen has historically been a major funding currency for carry trades due to Japan's prolonged low-interest-rate environment. Sudden reversals in carry trade positions, triggered by interest rate changes or geopolitical events, can cause sharp currency movements and financial market volatility.