Currency carry trades are enjoying their strongest run in decades as subdued volatility and resilient global growth encourage investors to borrow in low-yielding currencies and seek higher returns in emerging markets, according to a report by Bloomberg.
A strategy that has historically been vulnerable to sudden shifts in risk appetite has delivered strong gains in 2026, helped by relatively calm markets despite geopolitical tensions and the economic shock caused by the Iran war.
One popular trade highlighted by strategists at major banks involves borrowing euros to invest in a basket of the Brazilian real, Colombian peso and Turkish lira. The strategy has gained around 18% this year through last week, marking its strongest year-to-date performance since 2005, according to Bloomberg data.
Carry has outperformed other major currency strategies, including momentum and value. Citigroup, Goldman Sachs and JPMorgan have all highlighted the trade in recent research, while investors including Nuveen and Vontobel believe the strategy could continue to perform.
“With foreign-exchange volatility at new cycle lows, our expectation is for carry to continue to deliver,” JPMorgan strategists led by Meera Chandan said in a recent research note.
The euro has emerged as an increasingly popular funding currency as investors seek alternatives to the dollar and yen. The European Central Bank’s benchmark rate is 2.25%, below the Federal Reserve’s target range of 3.5% to 3.75%.
The relative stability of the dollar has also helped support the strategy. A measure of one-month implied volatility for the Bloomberg Dollar Spot Index recently fell to its lowest level since December, as cooling US inflation reduced expectations of near-term Federal Reserve action.
Hari Hariharan, chief executive of New York hedge fund NWI, said he favours selected carry trades and expects high-yielding currencies such as the Brazilian real to outperform the euro, yen and some lower-yielding European currencies.
Brazil’s real and Colombia’s peso have both generated total returns of at least 15% against the dollar this year.
However, the strategy remains vulnerable to abrupt currency moves. Because carry trades generate returns incrementally through interest-rate differentials, sharp exchange-rate moves can quickly erase months of gains and trigger forced deleveraging.
The risks were highlighted in August 2024, when a hawkish shift in expectations for Bank of Japan policy triggered a sharp rise in volatility and a stronger yen. Investors rushed to unwind leveraged positions funded in the Japanese currency, contributing to a brief disruption across global markets.
Hedge funds remain heavily positioned against the yen, with net short positions close to their highest level since 2007, according to Commodity Futures Trading Commission data.
Laura Cooper, global investment strategist and head of macro credit at Nuveen, said a repeat of the 2024 episode was possible but considered a disorderly global unwind less likely because expectations for Bank of Japan policy are now better reflected in markets.
The Federal Reserve remains another key risk for carry traders.
Steven Barrow, head of G-10 strategy at Standard Bank, said strong returns could continue but warned that an unexpected change in Fed policy could trigger a sharp repricing.
The prospect of a rate increase delivered without clear advance communication from policymakers would be particularly disruptive, he said.
Some investors are responding to uncertainty around the dollar and the possibility of Japanese intervention in currency markets by diversifying their funding currencies. The Swiss franc and Australian dollar are increasingly being considered alongside the euro.
Thierry Larose, a portfolio manager at Vontobel, said a diversified “all-weather” approach could allow investors to maintain exposure to emerging-market carry while reducing dependence on a single currency or a particular direction for the dollar.
