Mumbai: A free fall in the value of the dollar and lower US interest rates combined with the increasing volatility in the Japanese yen and the French franc have made carry trade in US dollar even more appealing to currency traders.

Traders are increasingly using the dollar to pay for purchases of currencies with higher yields, as it is the most profitable trade in the foreign-exchange market.

A basket of currencies, including the British pound, Brazilian real and Hungarian forint financed with dollars yielded returns of 17 per cent this year, compared with 9 per cent for yen-funded and 7 per cent for trades funded by Swiss francs.

The Japanese yen had plunged from a two-year high against the dollar amid a spurt in global stock prices, prompting investors to limit holdings of higher-yielding assets with the yen (carry trade).

The yen, which fell against most major currencies, declined the most against the Australian dollar.

It fell to 108.56 against the dollar in Tokyo morning trade, and was trading at 161.10 against the Euro.

Carry trade refers to speculators deriving funds from a country with low benchmark interest rates, while investing in a country with higher returns.

While the yen has fallen for most of the time, the dollar''''s slide to all-time lows recently has made it the favoured currency for carry trade.

The last time the dollar was used for carry trades was in 2004, when the Federal Reserve''''s target rate for overnight interbank loans was one per cent.

Since then, it has fallen 18 per cent on a trade-weighted basis, according to the Federal Reserve index. The dollar made up 64.8 per cent of central banks'''' currency reserves in the second quarter 2007, down from 71 per cent in the same quarter in 1999.