The carry trade is back in vogue with hedge funds and large institutional traders.

First of all, what is the "carry trade?" It is a very simple trade. Traders buy a currency, such as the yen, in which interest rates are near zero and buy a currency in which rates are higher, and they pocket the difference.

The U.S. dollar is considered a "safe haven" currency because it is the world's reserve currency. The Dollar Index contract is traded on the New York Board of Trade. It is traded as a single currency but the actual value of the dollar is based on a basket of currencies. What does this mean in actual trading? Traders usually decide to buy or sell a given currency based on the strength or weakness of the underlying economy for that currency. So when we see a headline: "Pound hits 23 year low on Dollar" it means that on a relative basis the pound is weaker than the U.S. dollar.

You could infer from this headline that the British economy is weaker that the U.S. economy and is the reason why the British pound is the weaker currency.

Trading in the currency markets, however, is not always as clear cut as this example. A host of complex variables go into determining a country's currency including the country's political and financial structure, who the leaders of a given country are and most important what is actually happening within that particular country's economy.

Ben Bernanke's buyout bailout is helping push the dollar to record lows. While this will make your travel outside the U.S. shockingly expensive, the Washington Post offers some ways you can invest to ease some of that pain:

• Buy foreign stocks. The U.S. investor converts dollars into the currency needed to buy the stocks, whether euros, pounds, yen or something else. Then, if the share price holds and the dollar falls, the investor gains when he sells the stock and converts the money back into dollars. If the share price has risen, the profit is even greater. Of course, if the dollar appreciates in the interim, the process works in reverse. As Barry Summerlin notes, my recommendation of Posco (NYSE: PKX) has gone up significantly since August, probably due in part to this effect.
• Buy U.S. companies with overseas earnings. buy the stocks of big, multinational U.S. companies that benefit from the weaker currency. A lower dollar helps boost U.S. exports by making them relatively cheap on world markets The Boeing Company (NYSE: BA) is among the beneficiaries of this trend.
• Buy CDs, mutual funds and exchange-traded funds packed with various currencies or linked to baskets of foreign exchange. More than $2.7 billion was invested in open-end currency funds by the end of July, up from $36 million at the end of July 2000, according to estimates by Lipper. So far, the falling dollar fund is the better bet: It is up 7.91% for the year, as of Thursday. The rising dollar fund is down 2.66%.

The New York Times [registration required] reports that the subprime meltdown has zipped across the Pacific to wipe out the fortunes of Japanese housewives who trade currencies after putting their children to sleep. Betting an average of $9.1 billion a day -- 20% of daily foreign exchange (FX) volume -- on a decline in the Yen relative to the dollar, many of these housewives were wiped out when the August credit crunch caused U.S. hedge funds to panic -- driving up the Yen's value and tanking their trades.

Japanese online investors lost $2.5 billion trading currency in August. And for many Japanese households, housewives' FX trading had been kept in the closet. Japanese tradition frowns on making money through means other than hard labor -- such as market speculation.

But this taboo is out in the open thanks to Mayumi Torii, according to the Times, a 41-year-old mother of one who said she earned $150,000 since she started margin trading in currencies early in 2006. Torii now appears on TV promoting her FX Beauties Club so she can "stand on my own economically," a necessity she discovered after her first marriage ended in divorce, and she and her son had to live off her meager savings. "I never want to feel that vulnerable again," she said.