Barclays Sounds the Alarm: A Double Blow from a Stronger Dollar and Violent Rate Swings Will End the "Honeymoon Period" for Carry Trades

Barclays strategists expect volatility in G10 currencies to rise and remain elevated as the dollar strengthens and interest-rate swings intensify. Realized volatility has yet to catch up with the higher levels priced into FX options, though Barclays expects that gap to narrow. Even if the dollar's rally pauses temporarily because investors have already placed substantial bets on further strength, Barclays strategists Marek Raczko and Leonardo Crimella wrote in a Tuesday report that "we expect the probability of higher FX volatility to only briefly decline." Higher currency volatility creates an "unfavorable environment" for carry trades. Carry trades had delivered strong returns since the U.S. announced sweeping tariffs in April 2025, but have now begun to underperform. The two strategists said that since the end of August, the risk-adjusted returns (returns relative to volatility) of most carry currencies have declined. Barclays expects any rise in currency volatility to persist and warns against betting on a rebound in carry currencies after a sharp selloff. "We see no value in chasing global carry trades," the strategists said, warning that emerging-market currencies may reprice.