US Dollar Resurgence: Carry Trade Outperformance and Market Risk Analysis

This analysis is based on the Bloomberg report [1] published on November 11, 2025, which highlights the US dollar’s remarkable comeback as one of the world’s most appealing assets, challenging prevailing “Sell America” trade narratives. The dollar’s resurgence represents a significant shift in market dynamics, with carry trades now delivering superior risk-adjusted performance compared to global equities and bonds.

Recent market data [0] reveals mixed performance across major US indices over the past 30 days:

• S&P 500
  : +0.75% (6722.14 → 6772.45)
• NASDAQ Composite
  : +0.41% (22886.16 → 22979.74)
• Dow Jones
  : +2.67% (46583.95 → 47829.58)
• Russell 2000
  : -2.37% (2466.68 → 2408.27)

The selective strength in large-cap indices contrasts with the dollar’s broader appeal, suggesting market participants are increasingly favoring the currency’s risk-return profile over equities, particularly small-cap stocks.

The dollar carry trade strategy involves borrowing in low-yielding currencies (primarily Japanese yen and Swiss franc) and investing in dollars, capitalizing on yield differentials. According to Bloomberg’s analysis [1], this strategy is delivering approximately 0.5% return per unit of volatility, significantly outperforming:

• European equities
• Chinese bonds
• Many global stock markets on a risk-adjusted basis

The dollar has demonstrated remarkable resilience, clawing back 3% from recent lows despite maintaining a 7% year-to-date decline [2]. This recovery coincides with several supportive market developments:

• Fed Policy
  : The Federal Reserve has moderated rate cuts while maintaining relatively high yields
• Government Resolution
  : The end to the US government shutdown has reduced uncertainty
• Volatility Environment
  : Suppressed volatility during the shutdown period enhanced carry trade attractiveness
• Structural Demand
  : Stablecoin assets hold approximately $150 billion in US Treasuries, creating consistent dollar demand [2]

The dollar’s resurgence reflects deeper structural changes in global finance:

: The emergence of stablecoins and digital dollar assets has created a new, persistent demand source for US Treasuries. With approximately $150 billion now held in digital dollar assets [2], this represents a structural shift that wasn’t present in previous dollar cycles.

: Despite US deficits exceeding 6% of GDP [2], the dollar maintains strength due to the combination of high yields and consistent financing needs. This creates a paradox where fiscal concerns, traditionally bearish for currencies, are offset by yield attractiveness.

: The current environment represents a significant psychological shift from earlier “Sell America” concerns. The dollar’s ability to maintain appeal despite political uncertainty, large fiscal deficits, and questions about long-term reserve currency status [1] demonstrates its enduring market position.

[2]. The current environment exhibits classic carry trade bubble characteristics where “every carry boom plants the seeds of its own reckoning.” Key concerns include:

: The suppressed volatility that makes carry trades attractive also masks growing systemic risk. As noted in market analysis [2], “the smoother the ride, the more crowded the train,” suggesting increasing concentration risk.

: A 10% drop in US stocks could trigger violent unwinding of dollar carry positions [2], creating potential for rapid market dislocation. The interconnected nature of modern markets means such unwinding could cascade across asset classes.

[2]. The primary concerns include:

1. Volatility Spike Risk
   : Any sudden increase in market volatility could force rapid position unwinding
2. Central Bank Policy Shifts
   : BOJ hawkish moves could disrupt funding currency dynamics
3. Treasury Yield Pressure
   : Rising yields could increase carry trade funding costs
4. Fiscal Sustainability
   : Long-term concerns about 6%+ GDP deficits could eventually impact dollar credibility

Despite the risks, several opportunities remain:

1. Yield Differential Persistence
   : Continued Fed policy support could maintain attractive carry trade returns
2. Digital Dollar Expansion
   : Growing stablecoin adoption creates structural demand
3. Relative Economic Strength
   : US economic performance versus other major economies supports dollar appeal

[2]:

• VIX and Currency Volatility
  : Breakouts could signal carry trade stress
• BOJ Policy Statements
  : Any hawkish shift could impact funding dynamics
• Treasury Market Flows
  : Foreign holder behavior indicates confidence levels
• Stablecoin Regulatory Developments
  : The GENIUS Act could accelerate digital dollar adoption

The US dollar’s current resurgence represents a complex interplay of monetary policy, market structure evolution, and investor behavior. While carry trades are delivering superior risk-adjusted returns of approximately 0.5% per unit of volatility [1], outperforming global equities and bonds, the concentration of positions creates significant systemic risk.

The dollar has recovered 3% from recent lows despite being down 7% year-to-date [2], supported by Fed policy, resolved government uncertainty, and growing digital dollar demand. However, the same factors driving current performance—suppressed volatility and yield differentials—also create conditions for potential market disruption.

• The current environment resembles previous carry trade cycles that ended with sharp corrections
• Digital dollar adoption through stablecoins represents a new structural support mechanism
• Fiscal sustainability concerns remain a long-term risk factor despite current dollar strength
• Market fragility increases as carry trade positions become more concentrated

The analysis suggests that while the dollar’s resurgence appears sustainable in the near term, market participants should remain vigilant for signs of volatility spikes or policy shifts that could trigger rapid position unwinding.