Euro shift highlights revival in carry trade The borrowing of euros by traders to invest in global assets is rising in a shift that banks say marks the start of a revival of so-called carry trade in currency markets. Reduced expectations of a third round of quantitative easing of monetary policy in the US combined with predictions that the European Central Bank will cut interest rates further are leading global investors to use the euro as a funding currency for carry trades. Such trades benefit from a fall in the euro as traders typically borrow the funds in the single currency, then sell it to take positions with other currencies. When they pay back the borrowings, the traders then benefit from any fall in the euro. In turn such carry trades can spur a fall in the euro. Traders say this is one reason why the euro has been the worst performing major currency this year, while currencies that benefit from an improvement in risk appetite including the Australian dollar and the Mexican peso are among the best performers. The euro hit fresh 16-month lows below $1.27 on Monday before rising slightly in what traders said was largely covering of short positions. As evidence of the increased use of the euro to fund trading positions, investment banks cite data that hedge funds are now shorting the euro at record levels as bearishness over the single currency has increased. Investment banks said that other long-term investors outside the US were also starting to fund their positions in euros, with expectations that interest rates would go lower making it cheaper to borrow the currency. Traders held a record 139,000 short positions against the euro last week, according to data from US Commodity Futures Trading Commission that is widely seen as proxy for broader trading activity. "The euro is increasingly used as a funding currency," said Hans Redeker, analyst at Morgan Stanley. A shift in the trading pattern of the dollar is further evidence that investors have turned to the euro instead of the dollar to fund their positions in other assets, investment banks say. Positive economic data from the US in recent days has boosted the dollar, reversing a trend that has been in place since the collapse of Lehman Brothers. But investment banks are not expecting a new carry trade to be as popular as the yen trade, which dominated markets before 2008. Lower availability of credit and higher volatility limited investors" ability to borrow to fund themselves in dollars last year, conditions that are expected to remain in place this year. The euro's fall might actually bring some benefits to the eurozone, helping stimulate exports. "Markets might not see a weaker euro as a failure on the part of policymakers," said Shahab Jalinoos at UBS.