Attractive and non-attractive currencies

•The risk-adjusted return of the carry trade depends on the attractive-ness of the currencies.•Time varying transaction costs and interest rates define the attractiveness.•Attractive currencies tend to deviate from UIP and to commove with the global SDF.•Non-attractive currencies tend to conform to UIP and do not commove with the global SDF.•Policy makers and forecasters may want to know the status of the currencies. In the foreign exchange market, time-varying transaction costs and interest rates may define the time-varying set of attractive currencies for investors. Our study shows that when the currencies are attractive, they tend to deviate from the uncovered interest rate parity and to comove with the global stochastic discount factor (SDF). Inversely, when they are non-attractive, currencies tend to conform more closely to uncovered interest parity and do not comove with the global SDF. As a consequence, both investors and policy makers may want to know the status of a currency as it conveys important information about the future return of the currency. We illustrate our point in a sample including 26 currencies over the period 1985--2017.