The term carry trade without further modification refers to currency carry trade : investors borrow low-yielding currencies and lend high-yielding ones. It tends to correlate with global financial and exchange rate stability, and retracts in use during global liquidity shortages.[2]
The risk of carry trades is that foreign exchange rates will change, and the investor will have to pay back now more expensive currency with less valuable currency.[3] In theory, carry trades should not yield a predictable profit because the difference in interest rates between two countries should equal the rate at which investors expect the low-interest-rate currency to rise against the high-interest-rate one. However, carry trades weaken the target currency, because investors sell what they have borrowed, and convert it into other currencies.
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