The dollar has been falling since the second quarter of 2020

The euro began to show weakness in recent weeks, briefly falling below the key level of 1.20 against the dollar.

For investors, the weakness of both the dollar and the euro poses a conundrum: which is the best financing currency for emerging market carry trades. Taken together, the dollar is still a favorite of investors.

The dollar has been falling since the second quarter of 2020 as the Fed cut interest rates to record lows and the COVID-19 epidemic hit the US economy. The euro began to weaken in recent weeks, briefly falling below the key level of 1.20 against the dollar as delays in coronavirus vaccination reduced expectations of Europe's economic recovery.

"We continue to favor the dollar as the financing currency for emerging market carry trades," said Norman Villamin, chief investment officer of wealth management at UBS, which manages the equivalent of $166 billion. "although the euro has weakened due to vaccination problems, we expect this to be temporary and this trend will be reversed as vaccination accelerates in continental Europe."

The challenge of finding the best financing currency comes as emerging market central banks begin to signal tightening monetary policy as the economy recovers. Its shift to hawkishness should help revive the carry trade, which was largely stagnant at a time when global yields were at a low ebb.

Both the dollar and the euro are falling against the currencies of developing countries. The dollar has fallen against 17 of 22 emerging market currencies in the past six months, while the euro has fallen against 14 of them this year.

The data show that if you borrow dollars and invest in a basket of 10 emerging market currencies at the beginning of this year, you will get a return of 1.6%; similar transactions using the euro as the financing currency will return 2.3%.

Here are the views of some investors and analysts:

Citigroup Inc-- favors financing in US dollars

Citi favours the use of dollars to fund its emerging market carry trade. Strategists such as Dirk Willer pointed out that, taking history as a mirror, the dollar depreciated more sharply than the euro during the global economic recovery.

Even if the US economy may grow faster than Europe, this is not enough to cause the dollar to strengthen, because an analysis of the previous three periods of outstanding US economic performance shows that even if the US economy rebounds fastest, the dollar tends to depreciate.

Dansk Bank-choose Euro financing

Dansk said the euro could depreciate because of the uneven pace of recovery between the EU and the US and the possibility of tightening monetary policy as China recovers from the epidemic. The latter may affect the demand for German goods, as China is the third largest export market for German goods.

Denmark expects the euro to weaken to $1.16 over the next 12 months and is currently around 1.2150.

JPMorgan Chase & Co-- favor euro financing

JPMorgan Chase & Co is advising his clients to reduce their positions in US dollar financing and switch to euros in the face of rising Treasury bond yields.

One of the deals they recommend is to use 100% euro financing to invest in the Russian rouble.