Traders borrowing U.S. dollars to fund investments in other currencies should beware, with analysts expecting the greenback to strengthen and advising a shift to borrowing the euro instead.
"U.S. rates and the U.S. dollar may get a pop from an expected jump in April inflation," Barclays said Monday in a note titled "Carry on, but don't fund with USDs."
Over the medium term, Barclays expects the U.S. inflation risks are to the upside, making it likely the greenback will continue to strengthen. Barclays expects the U.S. dollar index (DXY) to rise 5 percent by year end, with a 7.3 percent rise over 12 months.
A stronger U.S. dollar would dent the rationale for using the currency to fund carry trades, which is when investors borrow in a low-yielding currency, such as the yen or the U.S. dollar, to fund investments in higher yielding assets somewhere else. A weakening currency is central to the carry trade since it means that investors have less to repay when they cash out of the trade.