Carry trades in emerging markets up in 2026, as currencies hit multi-year highs

People who moved their money from the dollar into emerging market currencies are seeing strong profits at the start of 2026, and financial experts at major banks think this winning streak will keep going after last year’s impressive gains.

These investment approaches, known as carry trades, have already climbed 1.3% in 2026. A Bloomberg index that tracks returns from eight emerging markets shows these strategies are continuing their momentum from 2023, when they jumped 18%, the best performance since 2009.

Carry trades work by buying currencies from countries with high interest rates using borrowed money from countries where borrowing costs are cheaper. On Monday, the Bloomberg index stood above 291, coming within 5% of the record set back in 2011. Currencies ranging from South Africa’s rand to Colombia’s peso are trading at their highest levels in years.

Analysts at Morgan Stanley, Bank of America Corp., and Citigroup Inc. all expect these gains to continue building. Beyond just currency values going up, these strategies are also making money because real interest rates remain high across the developing world.

High interest rates drive strategy success

Central banks in many emerging countries are only slowly cutting interest rates, even though inflation numbers show prices are rising more slowly.

“For carry trades, we are looking at countries where monetary policy is tight and central banks are considered credible,” said James Lord, who leads emerging market strategy at Morgan Stanley. He pointed to Brazil’s real, Turkey’s lira, and the Czech koruna as his top picks for 2026.

Latin American currencies are doing particularly well. Brazil’s real has already delivered returns of 4.3% so far this year, adding to last year’s gain of 23.5%. The country keeps interest rates at 15% even though inflation has moved closer to what the central bank wants.

Citi strategists are also suggesting investors buy the real against the dollar, along with the Turkish lira. However, not all emerging currencies are succeeding.

As reported by Cryptopolitan previously, India’s rupee, which was the worst performer last year, continues to lose ground with a drop of about 2% in carry trade terms this year. Indonesia’s rupiah has also caused losses for investors.

The Bloomberg index shows the record year for carry strategies was 2003, with a 25% return. For investors to see similar big gains this time, the dollar needs to keep weakening, and emerging currency swings must stay small. Traders are watching JPMorgan Chase & Co’s volatility gauge closely, which hit a three-week high recently after a long period of calm.

President Donald Trump’s policies are playing a major role in pushing down the dollar’s value. Recently, Trump threatened to impose 10% tariffs on European countries in a dispute over Greenland, which rattled markets and added to concerns about the dollar. Financial markets see this as increasing political risk around the US currency.

Dollar’s reserve currency status under question

There are also growing worries about the dollar’s position as the world’s main reserve currency. With US policy becoming less predictable, European Union countries that hold $8 trillion in US assets may have leverage in trade disputes.

Trump’s tariffs represent the biggest US tax increase since 1993, equal to 0.55% of the country’s economic output, according to analysts. Fears of a wider trade war are building as these policies take shape.

Bank of America strategist Alex Cohen thinks carry trades will keep doing well, but only if market volatility stays low. “That’s a big ‘if’ as we sit here today,” Cohen said, pointing to possible conflicts around the world that could shake things up.

Despite these risks, the current environment of high emerging market interest rates combined with dollar weakness continues to favor investors willing to take on emerging market currencies. Whether this trend can match the historic returns of 2003 remains uncertain, but major banks are betting the conditions are in place for continued gains throughout 2026.

Emerging markets have shown surprising strength against expectations that trade tensions would hurt them most. With central banks in developing countries maintaining credibility and keeping tight monetary policy, the fundamentals appear solid for now.

However, any sudden spike in volatility or major geopolitical event could quickly reverse these gains. The success of carry trades in 2026 will depend on whether the current calm in currency markets can hold, and whether Trump’s unpredictable policy moves continue to weaken the dollar without triggering a broader financial crisis.

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