Currency focused funds are finding the foreign exchange markets a difficult place to find returns according to new data which has been released.

According to the Parker Index, which is a highly respected measure of currency fund returns, currency focused funds had their weakest performance since August 2007.

The index registered a loss of 0.79 per cent during its most recent reading in June, with the worst performing fund posting a loss of 5.97 per cent.

The index is up by just 0.71 per cent for the year.

Investors in the foreign exchange market are finding it a tough environment to obtain returns, after strong trends during the first half of 2010 ceased to continue, and future movements of key currencies became more difficult to predict.

The most reliable trades, in particular the carry trade, or the practice of purchasing currencies which yield higher interest rates have not delivered, falling flat in May and leaving many fund managers struggling.

The carry trade appeared to be making a strong come back at the start of the year as certain central banks began tightening interest rates.

The resurgence of the practice did not last very long after many fund managers in May were caught on the back foot when the Australian dollar declined by 13 per cent against the US dollar, in spite of the fact that interest rates in Australia were rising and the country’s future is tied to the robust economy of China.

The decline was largely on the back of the proposal to impose a super profits tax on the resource industry, which also impacted other carry trade, as investors began to sell off higher yielding currencies in exchange for the safer but lower yielding US dollar and Japanese yen.

Investors who sold the euro and yen in exchange for the dollar, which have been extremely popular trades also felt a sting as a result of the US dollar declining since June, catching many managers by surprise, and with all the volatility in global financial markets this year, it is likely that major market shifts are unlikely to end soon.