LONDON (Reuters) – Steep falls in the high-yielding New Zealand dollar and the Icelandic crown are early warnings to investors that markets are turning their attention to macro imbalances brewing ineconomies offering higher interest rates.
Higher interest rates in countries like New Zealand, Australia, Iceland, Brazil, Mexico, Hungary have lured investors to high yielding currencies and boosted their currencies in the past 12 to 18 months.
As major currencies remain trapped in tight ranges, more adventurous and risk-loving investors like hedge funds have tried to extract more yield for their portfolios by buying high-yielding assets.
But these so-called ‘carry trades,’ where investors borrow cheaply in say U.S. dollars or yen and invest in high yielders such as Australian and New Zealand dollars, may unravel as expectations for more rate hikes in the United States and Europe gather pace.
