MercoPress. South Atlantic News Agency

Roubini warns of an assets bubble because of the dollar-carry trade

Nouriel Roubini, Economics professor at New York University

The prevalent dollar-carry trade, in which investors borrow US dollars at 0% interest rates, to park in risky assets across the globe could come to an end in the foreseeable future, which may result in a major crash in such risky asset classes such as equities and commodities, according to economist Nouriel Roubini.

Roubini, famous for seeing the global financial crisis beforehand, said US Federal Reserve’s policy to keep interest rates near zero to boost demand was spurring an “asset bubble” across the globe, which could result in an asset bust, when it would raise rates, resulting in the strengthening of the US dollar.

“Everyone is buying dollar at almost zero rate. There is eventually going to be an unraveling of this carry trade,” Roubini said.

”When the snapback of the dollar occurs, it is not going to be 2% or 3%, it’s going to be more like 15-20%. Then, everybody would be left to close their shores on the dollar. You will have to sell these risky assets across the world and then you could have a huge asset bubble going into an asset bust. The crash will be as big as this bubble builds up to.”

However, Roubini said he sees the dollar carry trades continuing for a while as long as the Fed, along with other global central banks, does not increase rates.

“I don’t expect that however to occur in the short run because for the time being the Fed is on hold, they expect to stay on hold, they are not even finished to buy all the treasury and agency debt. So it is going to eventually occur but it is going to be six months from now or a year from now,” Roubini said.

But he also warned that “in the meanwhile, the bubble is going to become bigger globally and the bigger the bubble, the bigger is going to be the crash.”