FX Premia Around The Clock

We dissect return dynamics in the foreign exchange market into high-frequency components over the 24-hour day. Using twenty-four years of data on G10 currencies we unveil a distinct ‘W’ intraday pattern of returns to the dollar portfolio. We show that positive average returns for going long foreign currencies are almost entirely generated during U.S. main trading hours, whereas currencies collectively depreciate against the U.S. dollar overnight. Moreover, we document that 75% of the HML portfolio returns from a standard carry trade strategy and almost 80% of dollar carry returns are generated during the U.S. trading day. Finally, we show that our main result may be exploitable by investors that are able to benefit from lower than average transaction costs.