Definition from Wikipedia.org:
The term carry trade without further modification refers to currency carry trade : investors borrow low-yielding currencies and lend high-yielding ones. It tends to correlate with global financial and exchange rate stability, and retracts in use during global liquidity shortages.
The risk of carry trades is that foreign exchange rates will change, and the investor will have to pay back now more expensive currency with less valuable currency. In theory, carry trades should not yield a predictable profit because the difference in interest rates between two countries should equal the rate at which investors expect the low-interest-rate currency to rise against the high-interest-rate one. However, carry trades weaken the target currency, because investors sell what they have borrowed, and convert it into other currencies.
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