Flight to Safety or Flight from Carry?

August 2025, Paper: "This paper examines the distinction between safe-haven and funding currencies during periods of market stress, focusing on how global institutional investors allocate across currencies during crisis episodes. Using FX forward and sovereign bond flows from a major custodian bank, the study finds that while the CHF, JPY, and USD often attract inflows during crises, their roles can diverge. For example, the USD saw inflows during the Global Financial Crisis and major geopolitical shocks, while the 2024 carry crash centered on the JPY. A panel regression framework using institutional investor flows is developed to classify crises as either flights to safety or flights from carry. Carry was a larger factor than safe-haven demand in driving flows around Liberation Day. The distinction between carry and safety driven flows has become more important in recent years as USD rates have risen while those on CHF and JPY instruments have remained low."