a similar idea is the "currency carry trade"A thought I had:
I consider USD, EUR and GBP to the the 3 main strong currencies as a European based boglehead.
What would the historical results have been if one had £100 in the highest earning instant access account, in whatever currency offered the best rate at the time?
For example:
The first the highest instant access rate is available on GBP. He holds this and it accumulates,
Then there is an interest cut in GBP, an interest raise in EUR. He changes his currency to EUR at the rate on that day and invests it in EUR.
Down the line USD has the highest interest rate. He changes his currency to USD at the rate on that day and invests it in USD.
Will the demand for each currency change proportionally to the interest rate changes, and the FX fluctuations cancel out any gains made in a better interest rate?
Would be fascinating to see a study done on this!
https://www.investopedia.com/terms/c/cu ... ytrade.asp
your question is the right one: is the currency carry trade profitable or do FX fluctuations cancel out the gains of higher yields?
here is one recent article that looked at this and did not think the currency carry trade was profitable.
https://www.sciencedirect.com/science/a ... 0624000299
cheers,Highlights
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The foreign exchange carry trade strategy involves buying high-interest rate currencies and selling low-interest rate currencies.
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Carry trade strategies chosen as profitable in one period are generally not profitable in an ensuing period.
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Successful carry-trade strategies are mainly due to luck, even after allowing for learning and stop-loss strategies.
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Any consistency in carry trade profitability is confined to a brief historical period, 1998-2005.
grok
Statistics: Posted by grok87 — Wed Nov 13, 2024 5:38 am — Replies 1 — Views 70