Cross-currency carry trades involve borrowing in a low-yielding currency and investing in a higher-yielding currency to profit from interest rate differentials. The U.S. dollar (USD) is often used as a funding currency due to its liquidity and relatively lower yields compared to high-yielding currencies like the Australian dollar (AUD), New Zealand dollar (NZD), or emerging market currencies. When the Federal Reserve cuts interest rates, the USD becomes less attractive as a yield-generating asset, encouraging investors to engage in more carry trades. Lower U.S. rates reduce borrowing costs, making it cheaper to finance positions in higher-yielding currencies. This typically leads to capital outflows from the USD, causing it to weaken while boosting high-yielding currencies. However, if rate cuts signal economic weakness, market uncertainty may rise, leading to risk aversion. In such cases, traders unwind carry trades, driving demand back into safe-haven currencies like the Japanese yen (JPY) and Swiss franc (CHF). Thus, Fed rate cuts influence both the profitability and stability of carry trade strategies.