Dollar-funded carry trade hits longest win streak since 2008
Dollar-funded carry trade conditions are running hot. Borrowers take cheap US dollar funding and invest in higher-yield emerging-market currencies, and the strategy has posted its longest winning streak since 2008.
Key stats: Bloomberg’s eight-currency carry-trade index gained about 18% in 2025 (best year since 2009). By late January 2026, the index was already up roughly 1.3% year-to-date. The biggest standout is volatility: emerging-market FX has shown lower volatility than G7 FX for nearly 200 consecutive days, potentially the longest stretch since 2000.
Why it’s working: major institutions point to favorable interest-rate differentials plus sustained capital inflows into emerging markets. Goldman Sachs also flags G10 carry-trade conditions as the most favorable since 2000, supporting not only EM positions but also trades involving the yen and Swiss franc. Flows into EM assets accelerated across 2025 into 2026, reaching the fastest pace since 2019.
What could break the carry trade: carry trades often unwind violently when volatility spikes. Past examples include 2008, the 2013 “taper tantrum,” and the August 2024 yen carry trade unwind. The main wildcard is Fed policy: if the Federal Reserve turns hawkish or US yields move in a way that narrows the yield gap, incentives to borrow dollars and chase EM yields could fade.
Institutions (Morgan Stanley and Bank of America) remain broadly confident the trend can last into 2026 if there are no major macro shocks.
Neutral
This news is primarily about FX liquidity and risk appetite, not crypto fundamentals directly. A strong, low-volatility dollar-funded carry trade (longest since 2008) generally supports “risk-on” behavior and can indirectly benefit crypto via improved global leverage conditions and capital flows. However, the article stresses the key trading feature of carry trades: they unwind violently when volatility spikes.
That risk matters for crypto traders because crypto often reacts to broad funding stress, USD moves, and sudden changes in liquidity. Similar episodes referenced—2008, the 2013 taper tantrum, and the August 2024 yen carry trade unwind—show that calm periods can end abruptly, triggering fast repricing across risk assets.
In the short term, the current low-volatility regime and positive carry-trade momentum are mildly supportive (bullish tilt) for market stability. In the medium term, the Fed-policy wildcard (hawkish pivot or narrowing yield gaps) raises the probability of a rapid unwind scenario, which can pressure crypto during fast USD/volatility adjustments. Hence, the net expectation for crypto market impact is neutral: supportive background tailwinds, but with meaningful downside tail risk if funding conditions flip.