Carry trades surge as investors sell the dollar and chase high EM returns
Carry trades into emerging-market currencies have continued their 2025 momentum, rising about 1.3% in 2026 and building on an 18% gain last year. A Bloomberg index tracking eight emerging markets stood near a multi-year high, within 5% of its 2011 record. High nominal and real interest rates across developing economies — notably Brazil (real), Turkey (lira) and the Czech Republic (koruna) — are sustaining returns. Brazil’s real returned 4.3% so far in 2026 after a 23.5% gain in 2025; central bank rates there remain around 15%. Some currencies, such as India’s rupee and Indonesia’s rupiah, lagged and produced losses. Major banks (Morgan Stanley, BofA, Citi) expect carry gains to continue, but warn that a weaker dollar and low volatility are prerequisites. JPMorgan’s volatility gauge recently ticked higher, highlighting risk. Political uncertainty in the US — including tariff threats from President Trump — is cited as a factor weakening the dollar and raising geopolitical risk, putting pressure on the dollar’s reserve status. Analysts caution that a spike in volatility or a major geopolitical event could quickly reverse gains; nevertheless, the current mix of dollar weakness and high EM interest rates favors carry trades into 2026.
Bullish
For crypto traders, this news is broadly bullish because dollar weakness and strong carry flows into emerging-market assets can increase risk appetite and dollar-denominated liquidity that often spills into risk assets, including cryptocurrencies. Historically, periods of sustained dollar weakness and low volatility (when carry trades perform well) correlate with rally phases in risk-on markets. Key drivers here are high real yields in EM currencies and continued central-bank credibility, which sustain carry returns. However, the upside depends on two conditions: the dollar must continue to weaken and market volatility must remain subdued. A sudden volatility spike or major geopolitical event (e.g., trade wars, tariffs) could force unwinding of carry positions, trigger safe-haven flows into the dollar and gold, and cause sharp declines across risk assets including crypto. In the short term, expect higher risk appetite and potential capital flows into crypto when carry trade momentum continues and volatility stays low. In the long term, persistent US policy uncertainty and any escalation in geopolitical risk create tail risks that could reverse gains and pressure crypto markets. Traders should monitor USD indexes, JPMorgan volatility gauge, EM central-bank rate decisions, and major geopolitical headlines to time entries and manage leverage.