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According to Eiteman, Stonehill, & Moffett (2015), interest rates in the U.S. and in Europe are rather low and do not get higher than 1%. Such things might have happened because governments and the Central Banks of the countries had low premium rates in the period of the global financial crisis. They did so because they wanted to keep businesses liquid and enhance management of the accounting. At the time of the recession, investments became more substantial and soon large amounts of money were put into the financial system. False liquidity was injected into the economy and worsened the situation.
The emerging market carrying trade seems to treat as an advantage for the investor not only interest rate arbitrage but also exchange one, reaching combined effect. The number of foreign investments increases greatly as this trade develops rather fast, which streamlines its economic growth. In comparison with it, traditional uncovered interest arbitrage considers only interest rate as its benefit. Moreover, the economy develops in a similar way in the US and Europe. Such a difference can be observed because of this slow growth, which was adversely affected by the financial crisis while countries with new market tend to enhance their performance and move towards prosperity.
A lot of investors are shorting USD and EUR because they believe that they will not be able to overcome the carry trade and will fall soon. In this way, they use shorting as a preventive method that will protect them from losses caused by the depreciation of these currencies. Except for that, they will have a chance to earn some money when USD and EUR fall, which is a great advantage for them.
Reference
Eiteman, D., Stonehill, A., & Moffett, M. (2015). Multinational business finance. Upper Saddle River, NJ: Prentice Hall.
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