Emerging-market traders are moving away from using the US dollar to fund their carry trades, opting instead for currencies like the euro and Australian dollar. This shift is a direct response to the dollar's appreciation, with the US Dollar Index (DXY) reaching approximately 101 in late June 2026, its highest point in 13 months. The stronger dollar makes dollar-funded carry trades less profitable for investors seeking higher returns in emerging market assets. Money managers from firms like Invesco Ltd. and AllianceBernstein are among those reducing their reliance on the dollar for these positions.
Colombia and Brazil, which offer some of the highest real interest rates in emerging markets, have seen their currencies climb at least 5% against the dollar this year. Investment banks are also adapting their strategies; Morgan Stanley has advised clients to express optimism on developing names against a broader currency basket that includes the euro and yen, not just the dollar. Citigroup Inc. recently recommended betting on the Brazilian real strengthening against the euro and the Australian dollar.
The Australian dollar is considered appealing as a cheaper funding source, having traded near a two-month low at around 70.5 US cents in early June 2026 due to concerns about Chinese demand and softening commodity prices. Historically, the AUD has often been a recipient currency in EM carry trades, but its current weakness has reversed this trend. The euro's role as a funding currency for carry trades into emerging markets is a newer and less conventional strategy, and broad-based evidence for this specific shift remains mixed as of July 5, 2026.
The strengthening US dollar creates a challenging environment for risk assets globally, including emerging market equities, commodities, and even Bitcoin. A stronger dollar often signals a contraction in global liquidity, which typically leads to the unwinding of speculative positions. Crypto-native investors, in particular, are advised to monitor the DXY, as its current level of 101 is already exerting significant pressure on risk assets. Geopolitical tensions, especially in the Middle East, and evolving Federal Reserve interest rate policy expectations are contributing factors to the dollar's renewed strength.
However, there are caveats, especially regarding the Australian dollar. Its vulnerability to Chinese economic conditions means it might not be a consistently stable funding currency. A further deterioration in Chinese demand could weaken the AUD beyond what is useful for carry trades, potentially forcing traders back to dollar funding at even less favorable rates.
