Carry traders flee zero-yield dollar in emerging forex rush

Central banks across the developing world are signalling a retreat in the global currency wars, encouraging investors to flee the zero-yield dollar for emerging currencies even though the US money-printing exercise is approaching its end.
Recent weeks have seen the greenback hammered to record or multi-year lows against a raft of emerging currencies from the Korean won to the Brazilian real.
And the US Federal Reserve's broad trade-weighted dollar index, adjusted for inflation, is at its lowest since 1973, when the old gold-backed exchange rate system collapsed.
That sets the stage for a fresh phase in the global carry trade, with the dollar being flogged off to fund purchases of higher-yield assets, usually in emerging markets.
While the Federal Reserve is preparing to wrap up its $600 billion bond-buying programme, known as quantitative easing (QE), the dollar remains under pressure because US interest rates are unlikely to rise off current near-zero levels - Fed boss Ben Bernanke told investors as much this week.
Emerging central banks meanwhile have started raising interest rates, effectively heralding a retreat in the currency wars - a term coined last year by Brazil's finance minister - in which countries vied to drive down the value of their currencies.
"It all comes down to the dollar. We don't expect the end of QE2 to support the dollar," said Claire Dissaux, investment strategist at currency fund Millennium Global. "It may affect liquidity at the margin but it's not going to jeopardise the fundamental trade into emerging currencies."
Emerging markets had sought to minimise the impact of QE2 with a raft of measures and capital curbs to deter hot money inflows and tamp down currencies. But the ground has shifted.
"Now they are ready to let currencies appreciate," said Dissaux.
That is keeping the rally intact - currency gains should provide over half the returns for fund managers buying emerging local bonds this year, J. P Morgan reckons. To be sure, positioning for emerging FX appreciation is nothing new. Carry trades were all the rage during the 2005-2008 emerging markets boom and G3 states' stimulus policies after 2008 pushed a wave of cash into emerging assets, inflating their currencies versus the euro, dollar and the yen.