Carry Trade, Funded by the U.S.

There's an interesting piece out of Across the Curve today from a USD/JPY analysis. If it's a fluke of nature and prices revert to the recent normal relationships, it will be easier to predict the outcome of US fiscal policy. If this is the start of a protracted trend, the global dynamics of money flow will be very different.

Namely, all this excess liquidity piling up from US and global quantitative easing would not produce the normal expected price inflation in the U.S. if dollars are borrowed by the Carry Trade crowd to fund their currency speculations outside of U. S. borders.

3mth USD LIBOR is now LOWER 3mth JPY LIBOR. This spread turned negative about three weeks ago, and in the same timeframe, Usd/Jpy has also fallen 2.9% (see chart attached).
Bottom line, the USD is soon becoming the new global funding currency...
(Source: Across the Curve)

We're not going to jump on a bandwagon touting that last sentence just yet, but if it comes to fruition it would sure change the dynamics of Bernanke's unwinding process. It might be the mechanism that gives the U.S. another stab at exporting the fiscal consequences of policies to the developing world. In other words, more of what has just happened in the last 10 years.