The carry trade, a strategy where investors borrow in low-interest currencies (like the US dollar, Japanese yen, or euro) and invest in higher-yielding emerging market currencies (such as the Turkish lira), is currently enjoying its longest winning run since 2008. Cathy Hepworth, who leads PGIM’s $1.5 trillion emerging-markets debt team, highlighted carry as her highest-conviction theme in the developing world, noting that interest payments on bonds or money-market funds in some currencies, like the Turkish lira, can reach 40% or more. This robust performance follows a strong start to 2026, where carry trades were up 1.3% according to a Bloomberg index tracking eight emerging markets, building on an 18% rally from the previous year, which was the biggest since 2009. Strategists at major banks like Morgan Stanley, Bank of America Corp., and Citigroup Inc. anticipated this continued rally, partly attributing it to factors like President Donald Trump’s policies weighing on the dollar.
However, this generally positive trend for carry trades has seen some fluctuations and risks. In May 2026, the emerging-market carry trade rebounded after losses incurred from the Iran war. This rebound was fueled by surging crude oil prices, which reinforced expectations for elevated interest rates and bolstered commodity-exporting currencies. An index measuring this strategy, involving borrowing in the yen, Swiss franc, and Chinese yuan to invest in eight higher-yielding emerging market currencies like the Brazilian real and South African rand, had jumped approximately 2.6% from its March low and gained about 1.2% since the conflict began in late February.
Despite the overall strength, specific geopolitical events have introduced volatility. On August 6, 2026, most emerging-market currencies weakened following news of an agreement between Iran and Oman to reopen the Strait of Hormuz, which raised concerns about reigniting tensions with the US. The South African rand and Hungarian forint notably plunged to daily lows as oil prices climbed over 5% due to reports that the deal might restrict passage for vessels from the US, Israel, and other “hostile nations.” Currencies from Brazil and Mexico also trimmed earlier gains, and the MSCI index for emerging-market stocks extended its decline.
Furthermore, the Japanese yen has become a key funding currency for carry trades, with investors actively exploiting interventions aimed at propping it up. Each intervention by authorities to support the yen has paradoxically created new opportunities for investors to sell it and use it to buy higher-yielding assets. Despite historic joint US-Japan actions in August 2026 to strengthen the yen, the currency continued its slide towards 160 per dollar, nearing its worst week against the greenback since mid-May. This persistent weakness is largely attributed to the significant interest rate differential between Japan and other major economies, making the yen an attractive borrowing currency for carry trade strategies.
