Dollar: Weak Energy Supports Carry Trades – ING

ING analyst Chris Turner's latest view suggests that the recent weakness in the energy market is becoming a key factor supporting carry trades. Falling oil prices, combined with recent intervention remarks from U.S. Treasury Secretary Scott Bessent, have jointly driven down long-term U.S. Treasury yields by 10 to 15 basis points. This move has directly lowered volatility in the foreign exchange and equity markets, creating a more stable macro environment for the strategy of borrowing low-yield currencies and investing in higher-yield assets.

**The decline in U.S. Treasury yields is the core transmission channel**

Turner's analytical logic is that softer energy prices help ease inflation expectations, while Bessent's remarks may be interpreted by the market as a form of policy-level recognition or guidance toward a downward path for interest rates. Together, these factors have pushed U.S. Treasury yields lower. As the anchor for global asset pricing, the decline in U.S. Treasury yields reduces the holding cost of the dollar and curbs the risk-averse sentiment triggered by sharp interest rate fluctuations, which is directly reflected in the pullback of volatility indicators.

**A low-volatility environment is favorable for carry trades**

The core profit source of carry trades comes from the interest rate differential between currency pairs, with its greatest risk being sharp adverse market price movements. Currently, the low-volatility environment driven by falling U.S. Treasury yields provides an ideal window for such trades. Investors can more steadily earn spread gains without over-worrying about losses from sudden currency reversals. The U.S. dollar index is currently trading near 99.00, and its relatively stable posture also confirms that current market risk appetite is fairly steady.

**Attention needed on upcoming energy prices and policy direction**

Despite the currently favorable environment, the stability of carry trades remains highly dependent on the persistence of low volatility. Market reports indicate that geopolitical factors and other elements could still trigger a rebound in energy prices, thereby reversing the downward trend in U.S. Treasury yields. Additionally, the Federal Reserve's future policy path remains a core variable, as any unexpectedly hawkish signals could break the current calm. Therefore, how long this carry trade window, supported by weak energy, can last still requires close monitoring.