Barclays Sounds the Alarm: Dual Impact of Stronger Dollar and Volatile Interest Rates May End Carry Trade's "Sweet Spot"

According to Jinse Finance APP, Barclays strategists anticipate that the volatility of G10 currencies will rise and remain elevated as the US dollar strengthens and interest rate fluctuations intensify.

Actual volatility has not yet caught up with the higher levels priced in by FX options; however, Barclays expects this gap to narrow.

Even if the rally in the US dollar pauses temporarily due to investors already heavily betting on its further strengthening, Barclays strategists Marek Raczko and Leonardo Cremona wrote in a report on Tuesday, “we expect the probability of increased FX volatility to only recede briefly.”

Higher currency volatility creates an “unfavorable environment” for carry trades. Since the US announced comprehensive tariffs in April 2025, carry trades have delivered strong returns but are now starting to underperform. The two strategists said that since late August, most carry trade currencies’ risk-adjusted returns (returns relative to volatility) have declined.

Barclays expects any rise in currency volatility to persist and warns against betting on a rebound in carry trade currencies after a sharp selloff. “We see no value in chasing global carry trades,” the strategists stated, also warning that emerging market currencies could be repriced.