This paper documents that carry traders are subject to crash risk: i.e., exchange rate movements between high-interest-rate and low-interest-rate currencies are negatively skewed. We argue that this negative skewness is due to sudden unwinding of carry trades, which tend to occur in periods in which risk appetite and funding liquidity decrease. Funding liquidity measures predict exchange rate movements, and controlling for liquidity helps explain the uncovered interest-rate puzzle. Carry-trade losses reduce future crash risk, but increase the price of crash risk. We also document excess co-movement among currencies with similar interest rate. Our findings are consistent with a model in which carry traders are subject to funding liquidity constraints. The paper analyzes the relationship between interest rate differentials and currency crash risk. It finds that high interest rate differentials predict negative skewness, i.e., carry trade returns have crash risk. The findings are consistent with the saying among traders that "exchange rates go up by the stairs and down by the elevator." The paper also documents that currencies with similar interest rates co-move, controlling for other effects. The paper also examines the risk premium associated with crash risk, i.e., the "price" of crash risk. It finds that high levels of the TED and the VIX predict higher future returns to the carry trade, that is, relatively higher returns for high-interest currencies and lower returns for low-interest currencies. Controlling for this effect reduces the predictability of interest rates, i.e., this helps to explain the UIP violation. The paper also documents that currencies with similar interest rates co-move, controlling for certain fundamentals and country-pair fixed effects. This could be due to common changes in the size of the carry trade that lead to common movements in investment currencies, and common opposite movements in funding currencies. The paper finds that interest-rate differentials predict skewness. It also finds that the level of carry trade activity and recent losses of carry trade strategies affect physical and risk-neutral conditional skewness. The paper also finds that risk reversals have a negative relationship to interest rate differentials and that the relationship between risk reversals and skewness is positive, but controlling for other variables gives rise to a somewhat surprising negative coefficient. The paper also examines the dynamic relationships between interest rate differentials, FX rate changes, futures positions, and skewness over longer horizons. It finds that carry trades are destabilizing, as positive shocks to the interest rate differential lead to appreciation of the foreign exchange rate and negative skewness. The paper also finds that carry trades may be profitable because exchange rates initially underreact to interest-rate shocks.This paper documents that carry traders are subject to crash risk: i.e., exchange rate movements between high-interest-rate and low-interest-rate currencies are negatively skewed. We argue that this negative skewness is due to sudden unwinding of carry trades, which tend to occur in periods in which risk appetite and funding liquidity decrease. Funding liquidity measures predict exchange rate movements, and controlling for liquidity helps explain the uncovered interest-rate puzzle. Carry-trade losses reduce future crash risk, but increase the price of crash risk. We also document excess co-movement among currencies with similar interest rate. Our findings are consistent with a model in which carry traders are subject to funding liquidity constraints. The paper analyzes the relationship between interest rate differentials and currency crash risk. It finds that high interest rate differentials predict negative skewness, i.e., carry trade returns have crash risk. The findings are consistent with the saying among traders that "exchange rates go up by the stairs and down by the elevator." The paper also documents that currencies with similar interest rates co-move, controlling for other effects. The paper also examines the risk premium associated with crash risk, i.e., the "price" of crash risk. It finds that high levels of the TED and the VIX predict higher future returns to the carry trade, that is, relatively higher returns for high-interest currencies and lower returns for low-interest currencies. Controlling for this effect reduces the predictability of interest rates, i.e., this helps to explain the UIP violation. The paper also documents that currencies with similar interest rates co-move, controlling for certain fundamentals and country-pair fixed effects. This could be due to common changes in the size of the carry trade that lead to common movements in investment currencies, and common opposite movements in funding currencies. The paper finds that interest-rate differentials predict skewness. It also finds that the level of carry trade activity and recent losses of carry trade strategies affect physical and risk-neutral conditional skewness. The paper also finds that risk reversals have a negative relationship to interest rate differentials and that the relationship between risk reversals and skewness is positive, but controlling for other variables gives rise to a somewhat surprising negative coefficient. The paper also examines the dynamic relationships between interest rate differentials, FX rate changes, futures positions, and skewness over longer horizons. It finds that carry trades are destabilizing, as positive shocks to the interest rate differential lead to appreciation of the foreign exchange rate and negative skewness. The paper also finds that carry trades may be profitable because exchange rates initially underreact to interest-rate shocks.