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.

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After falling at the start of the year, the Australian dollar has rallied of late, surging back to above US90c and many analysts expect the Aussie to achieve parity with the greenback before the year is out.

Currency analysts from Citigroup say they believe that when measured against its G10 rivals, which include the US Dollar, Pound Sterling, and Euro, the Australian dollar is expected to be a top performer.

“The Australian dollar may well be the G10 currency of choice in 2010,” Citi currency strategists said.

Paul Brennan, chief economist for Citigroup says that the Aussie has strong fundamentals in its favour.

“The market has actually been raising its forecasts for the increases that are likely to be agreed on the (contract prices for) coal, so that supports the Australian dollar. You have the Reserve Bank continuing to raise interest rates while other countries are unlikely to in the near term; and then from a risk appetite point of view there has been progress in dealing with the financial crisis in Greece, and that is helping to support risk appetite.” Mr. Brennan said.

The dollar also rose to its highest point in a decade against the New Zealand dollar yesterday, hitting $1.31 in the morning.

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Gary Tilkin, the chief executive of online foreign exchange broker GFT, says a new class of investors will arise from the aftermath of the financial crisis, individuals who feel that can deliver better returns than professional fund managers, some of whom were paid for returning double digit losses last year.

“We are going to promote it as a speculative investment where there is a chance for significant loss and a chance for significant gain and the more you study, the more you educate yourself and the better tools you use, the better your chances of getting into the significant profit category.” Mr. Tilkin said in an interview with The Australian.

Currency trading has been in existence in its present form since most governments abandoned the Bretton Woods agreement of fixed exchange rates during the early 70’s. However over the last decade, currency trading has taken off amongst retail investors.

Brokerage firms such as GFT have the ability to offer their brokerage clients spreads on currencies that are as tight as the spread that the world’s biggest banks trade at.

GFT has seen an increase in foreign exchange volumes of 78 per cent, between the second quarter of last year, to the second quarter of this year.

“Volatility is really what traders want or should want because it is opportunities If there isn’t volatility the markets just go sideways, and sideways without much up and down movement is not really an opportunity. It does cut both ways of course – extreme, volatile markets can be higher-risk but the other side is higher potential reward.” Mr. Tilkin said.

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