Carry trades thrive in an environment of low volatility which means that should the VIX continue to rise, and it appears to want to, carry trades could suffer more losses.

Traders who thrive on volatility should not be disappointed in the week ahead because the US has an extremely heavy economic calendar that will indicate whether Federal Reserve Chairman Ben Bernanke was right to be more worried about growth than inflation.

In his testimony to Congress today, Fed Chairman Bernanke commented on the upside risks to inflation but focused more on the downside risks to growth. He expects growth to slow noticeably in the fourth quarter, which confirms his dovishness. If he had done the opposite and focused more on inflation like his counterparts in the Eurozone and Australia, the dollar could have rallied.

Fed officials speaking today are not worried, and feel that the effect on inflation from the weak dollar is limited and that the US also needs a weaker currency to boost growth.

The Reserve Bank of Australia's second interest rate increase this year highlights the degree of inflation pressures the economy faces at the current moment.

A situation now exists where traders and investors think that the Federal Reserve needs to continue cutting interest rates but the Fed does not want to do that; therefore whichever party manages to convince the other will decide whether the US dollar has bottomed.

Traders wonder why a non-farm payrolls report that doubled expectations could have sent the US dollar to a fresh record low against the Euro and Canadian dollar.

Equity and currency traders are both positioned for a strong payrolls report. With the market so divided, NFPs could decide not only who is right, but also whether the US dollar has hit a bottom.

The Federal Reserve cut interest rates by 25bp and the US dollar dropped to a new record low against the Euro and multi-decade lows against the British pound, Australian and Canadian dollars. The price action in the markets today suggests that traders do not believe today’s rate cut will be the Fed’s last.

The expectation that US interest rates are expected to decline further is quickly turning the US dollar into the new funding currency for carry trades, next to the Japanese yen and Swiss franc.