According to Jinshi, a stronger dollar has been driving carry trades in G10 currencies as traders tend to avoid emerging markets with greater volatility. A measure of institutional trading strategies for G10 currencies is expected to record its best half-year performance in 14 years, with a nearly 6% increase since January this year. In contrast, the carry trade index tracking eight emerging markets is flat.
After months of trading within a narrow range, policy divergence among major central banks is increasingly becoming a more exciting backdrop for G10 currency volatility. Institutions including Allspring, GAM Investments and TD Securities are betting on significant moves in major global currencies and reducing their exposure to emerging markets. The carry trade is part of its appeal, driven largely by a stronger U.S. dollar and weakness in currencies such as the Swedish krona and the Swiss franc as they signal central banks may start cutting interest rates sooner.