Mid July 2007 has caught many carry traders off-guard. Currency investors are suffering their biggest losses in years as wider swings in Forex currency market knock the carry trade off the rails.

Carry trade, the most profitable strategy in foreign exchange, thrives when exchange rates are stable since the technique involves buying and investing currencies of countries that have high interest rates using money borrowed in Japan. With huge spikes in currency volatility traders are forced to get out of their carry trades.

An index of volatility for major currencies more than doubled from a record low in June 2007.

Investors buying back yen drove it to 112 per dollar last week, cutting carry trade profits.

Sources JPMorgan,
Bloomberg.com

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