Dollar Volatility Hits Multi-Month Lows as Carry Trades Persist

The US dollar's volatility has dropped to multi-month lows as carry trades persist in the foreign exchange market, according to ING analysts. The persistence of carry trades, where investors borrow low-yielding currencies like the yen or Swiss franc and invest in higher-yielding assets, is driving down the dollar's implied volatility.

Data from the Cboe FX options market shows that one-month dollar index volatility has been hovering near its lowest levels since early 2022. This reflects both market positioning and a lack of major catalysts on the horizon, such as surprise central bank moves or geopolitical shocks.

ING's note warns that this calm may be deceptive, citing the potential for a sudden repricing of interest rate expectations if economic data surprises or central banks alter their guidance. This could spark a volatility spike and unwind carry positions rapidly.