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.
BREAKING DOWN '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.