Track 05Module 3 of 67 sources
The dollar, carry and the global financial cycle
Explain why a strong dollar tightens conditions everywhere, and how carry trades build and unwind.
Key ideas
- The dollar is the world's funding currency. When it strengthens, dollar debts get heavier and global lenders pull back.
- Capital flows, credit and risk assets move in a common global cycle driven largely by US policy and risk appetite. A floating currency gives only partial insulation.
- Carry trades borrow a low-yield currency to buy higher-yielding assets. They earn steadily and unwind violently when volatility rises.
- For India, a rising dollar usually means foreign selling and a weaker rupee. Exporters gain and importers lose.
Start hereWatch or read these first. They carry the core idea.
The Yen Carry Trade Explained with Examples and What Happens When It Unwinds (2025)
Video · Preet Banerjee · 11:21
The yen carry trade with worked numbers.
Report
The market turbulence and carry trade unwind of August 2024 (BIS Bulletin 90)
BIS · 2024
The official account of the August 2024 carry unwind. Eight pages.
CoreThe standard references. Work through them once the idea is clear.
Paper
The Dollar Exchange Rate as a Global Risk Factor: Evidence from Investment
Avdjiev, Bruno, Koch et al. · 2019 · IMF Economic Review · doi:10.1057/s41308-019-00074-4
Shows that a stronger dollar goes with weaker cross-border lending and investment.
Paper
Dilemma not Trilemma: The Global Financial Cycle and Monetary Policy Independence
Rey · 2015 · doi:10.3386/w21162 · free copy
The global financial cycle. Argues that open economies import US monetary conditions whatever their exchange rate regime.
Paper
Carry Trades and Currency Crashes
Brunnermeier, Nagel, Pedersen · 2008 · NBER Macroeconomics Annual · doi:10.1086/593088
Why carry currencies go up by the stairs and down by the lift.
How the Japanese Yen "Carry Trade" Fuels Global Bubbles
Video · Behind Asia · 38:14
A long history of how the yen carry trade fed bubbles elsewhere.
Go deeperResearch, primary sources and data for when you want the detail.
Report
Practice
When the dollar index moves more than one percent in a week, write down what USD/INR, the Nifty and foreign flows did. Build your own table over a quarter.
See it live
Where this leads
05.4 · Macro and LiquidityIndia macro: the RBI, the rupee, crude and external balancesFollow Indian monetary policy and the external accounts well enough to anticipate their effect on sectors.05.6 · Macro and LiquidityCross-asset: how stocks, bonds, oil, gold and currencies move togetherUse relationships between markets to confirm or question a view, and notice when a relationship changes.