The US dollar’s implied volatility has tumbled to levels not seen since early 2022, driven by the continued dominance of carry trades and a lack of major market catalysts, according to a recent analysis from ING. This decline reflects a period of relative tranquility in the global foreign exchange market, but the bank cautions that the calm could be deceptive.
Carry trades fuel low volatility
ING analysts point to the persistence of carry trades—where investors borrow in low-yielding currencies like the Japanese yen or Swiss franc and invest in higher-yielding dollar assets—as the primary reason for the compression in volatility. Implied volatility, a gauge of expected price swings, has dropped to multi-month lows, with the one-month dollar index measure hovering near its lowest since early 2022 as of late March 2025. The strategy remains profitable as long as central banks maintain steady policy paths and interest rate differentials stay wide.
Euro rangebound amid broader calm
In a separate note, ING highlighted that the euro is trading in a narrow range against the dollar, with EUR/USD oscillating near the 1.08 level. The lack of directional momentum mirrors the overall drop in currency volatility, as the market has priced in the expected policy trajectories of both the European Central Bank and the Federal Reserve. Support and resistance levels have held firm, leading to a consolidation phase that favors range-trading strategies in the short term.
Risks beneath the surface
Despite the current stability, ING warns that the environment is fragile. A sudden repricing of interest rate expectations—prompted by hotter-than-expected US inflation data or a hawkish shift in Fed commentary—could trigger a sharp volatility spike. Similarly, an escalation in geopolitical tensions or surprise central bank moves could rapidly unwind carry positions. The bank advises traders to monitor upcoming economic releases and central bank speeches closely, as a sustained break in volatility could signal a regime shift.
The low-volatility backdrop offers predictable conditions for businesses managing currency risk but also encourages higher leverage and risk-taking among traders thin profit margins. ING’s message underscores that the current calm should not breed complacency, as historically, volatility can return abruptly and forcefully.
