Carry trades, a strategy where investors borrow in low-yielding currencies (like the euro, yen, or Swiss franc) and invest in higher-yielding assets, particularly in emerging markets, are having their most successful run in decades during 2026. This success is attributed to unexpectedly muted volatility across asset classes and a resilient global economy, even in the face of the oil shock caused by the Iran war. This environment has bolstered risk appetite among traders seeking high yields in developing nations.
Prominent financial institutions like Citigroup Inc., Goldman Sachs Group Inc., and JPMorgan Chase & Co. are actively promoting carry trades. One particularly successful version of this strategy involves borrowing in euros to purchase a basket of currencies including the Brazilian real, Colombian peso, and Turkish lira. This specific trade has seen an impressive return of roughly 19% year-to-date in 2026, marking its best performance since 2005.
While the yen has traditionally been a primary funding currency due to Japan's historically low interest rates, investors are increasingly diversifying their funding sources. The euro, with its benchmark rate at 2.25% (lower than the Federal Reserve's target range of 3.5%-3.75%), has become an appealing alternative. Other currencies like the Swiss franc and Australian dollar are also being used to fund these trades, reducing reliance on the yen, especially given past volatility and the potential for Japanese intervention to strengthen the currency. This diversification has made the carry trade more resilient to yen fluctuations compared to previous periods like August 2024, when a sharp yen rally caused significant market disruption. Investors are being advised by firms like Goldman Sachs to carefully select both their funding and investment currencies.
