Funding Currencies

AAA

DEFINITION of 'Funding Currencies'

Monies that can be borrowed at low interest rates, making them ideal to bankroll purchases of higher yielding assets including stocks, other currencies, bonds and commodities. Speculators earn the spread or carry between the funding currency and the higher-yielding asset.


Apart from the risk of a price decline in the funded asset, the biggest risk in a carry trade is that of a steep appreciation in the funding currency if it is not the speculator's home currency.

INVESTOPEDIA EXPLAINS 'Funding Currencies'

The Japanese yen was among the most favored funding currencies in the first decade of the 2000s, due to the near-zero interest rates in Japan for most of this period. By early 2007, the yen had been used to fund an estimated US$1 trillion in carry trades. The yen carry trade unraveled spectacularly in 2008 as global financial markets crashed, as a result of which the yen surged against most major currencies.

RELATED TERMS
  1. Tequila Effect

    Informal name given to the impact of the 1994 Mexican economic ...
  2. High-Yield Bond

    A high paying bond with a lower credit rating than investment-grade ...
  3. Currency Risk

    A form of risk that arises from the change in price of one currency ...
  4. Arbitrage

    The simultaneous purchase and sale of an asset in order to profit ...
  5. Currency Carry Trade

    A strategy in which an investor sells a certain currency with ...
  6. Forex Spread Betting

    A category of spread betting that involves taking a bet on the ...
RELATED FAQS
  1. How do I Implement a Forex Strategy when spotting a Sanku (Three Gaps) Pattern?

    A forex trading strategy can easily be implemented to profit from a market reversal signal that comes from the sanku, or ... Read Full Answer >>
  2. What's a good forex strategy to use when spotting a Wedge-shaped Pattern?

    Use wedge-shaped patterns to identify bullish or bearish price action when trading currencies in the foreign exchange (forex) ... Read Full Answer >>
  3. How do I use Time Segmented Volume (TSV) for creating a forex trading strategy?

    You could use time segmented volume (TSV) to build a forex trading strategy, which allows you to compare volume data to determine ... Read Full Answer >>
  4. How do I close a long position in forex?

    Closing a long position in forex trading depends on whether you are using a broker operating under U.S. trading regulations. In ... Read Full Answer >>
  5. How do I implement a forex strategy when spotting a Upside Gap Two Crows Pattern?

    The upside gap two crows is, in theory, a bearish reversal pattern found in both the stock and forex markets. While there ... Read Full Answer >>
  6. What are the most common market indicators forex traders follow?

    There are literally hundreds of technical indicators for forex traders to choose from, however, there are a few which may ... Read Full Answer >>
Related Articles
  1. Forex Education

    The Credit Crisis And The Carry Trade

    When boom times turned to bust, these trades proved devastating for traders and the broader markets.
  2. Forex Education

    Currency Carry Trades 101

    This strategy can provide returns even if the currency pair doesn't move a cent.
  3. Forex Education

    The U.S. Dollar And The Yen: An Interesting Partnership

    In order to make the USD/JPY relationship more understandable, we must look at the yen in terms of treasury bonds.
  4. Forex Strategies

    Strategies For Forex Algorithmic Trading

    Algorithmic trading strategies, such as auto hedging, statistical analysis, algorithmic execution, direct market access and high frequency trading, can expose price inconsistencies, which pose ...
  5. Forex Strategies

    The Evolution Of A Retail Trader

    How do you evolve as a trader? If you are new to forex trading, do yourself a favor and find an education that fits your personality.
  6. Forex Strategies

    What Makes the EUR/USD A Risky Trade Now?

    What are the current risks of trading the EUR/USD pair? The Fed may raise interest rates this summer and the ECB has begun a quanitative easing program.
  7. Mutual Funds & ETFs

    Invest in Emerging Market Currencies with this ETF

    Why this emerging market currency ETF needs to be on your radar.
  8. Forex Strategies

    An Introduction To Trading Forex Futures

    We explain what forex futures are, where they are traded, and the tools you need to successfully trade these derivatives.
  9. Trading Systems & Software

    Brokerage Reviews: TradeStation Vs. Interactive Brokers

    These are among the most sophisticated brokers in the industry in terms of investment offerings, market access and technology.
  10. Trading Strategies

    Trade Forex Through Inside Day Breakout Strategy

    Inside day breakout is a popular strategy for forex trading. Here's how to recognize the patterns, entry/exit points and trading scenarios.

You May Also Like

Hot Definitions
  1. Bund

    A bond issued by Germany's federal government, or the German word for "bond." Bunds are the German equivalent of U.S. Treasury ...
  2. European Central Bank - ECB

    The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed ...
  3. Quantitative Easing

    An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
  4. Current Account Deficit

    A measurement of a country’s trade in which the value of goods and services it imports exceeds the value of goods and services ...
  5. International Monetary Fund - IMF

    An international organization created for the purpose of: 1. Promoting global monetary and exchange stability. 2. Facilitating ...
  6. Risk-Return Tradeoff

    The principle that potential return rises with an increase in risk. Low levels of uncertainty (low-risk) are associated with ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!