Investors extend EM currency carry bets into 2026 as low rates and a softer US dollar fuel returns
Carry trades in emerging-market currencies are delivering equity‑like returns, and major global managers still see room to run into 2026 — a combination that matters for portfolios hunting yield in a lower‑rate world.
According to Bloomberg, one of its gauges of emerging‑market carry strategies is up about 17 percent this year, the strongest performance since 2009, as investors borrow in low‑yielding currencies and buy higher‑yielders against a weaker US dollar and subdued FX volatility.
The US dollar has fallen more than 7 percent in 2025, helping support these trades.
Large institutions including Vanguard Group Inc., Invesco Ltd., Goldman Sachs Group Inc. and Bank of America Corp. expect the gap between developed‑market and emerging‑market policy rates to persist into next year, with the Federal Reserve and other major central banks seen keeping borrowing costs low.
In theory, that backdrop continues to favour emerging‑market currencies and supports the carry trade.
On the opportunity side, managers are focused on specific high‑yielders.
Gorky Urquieta, co‑head of emerging‑market debt at Neuberger Berman, told Bloomberg that “the carry trade still offers value, especially in high-yielders like Brazil, Colombia, and select African markets,” while adding that after this year’s gains, “opportunities are becoming more selective.”
Currencies such as Brazil’s real and Colombia’s peso, backed by elevated benchmark rates, have gained more than 13 percent against the US dollar this year.
Portfolio views are showing up in concrete trades.
As per Bloomberg, Wim Vandenhoeck, co‑head of emerging‑market debt at Invesco, is positive on the Brazilian real, Turkish lira and South Africa’s rand.
On a recent podcast, Brian Dunne, head of Americas foreign exchange options trading at Goldman Sachs, highlighted short US dollar positions versus the Brazilian real, South African rand and Mexican peso; an equal‑weighted basket of those trades has returned about 20 percent year‑to‑date.
Invesco has been selling the US dollar versus the South African rand and the euro versus the Hungarian forint, with the forint trade returning roughly 11 percent this year including carry.
Bank of America, according to Bloomberg, favours buying the Brazilian real against the Colombian peso, a rate‑differentials trade that has earned more than 2 percent so far.
The broader emerging‑market currency backdrop has improved as well.
Reuters reports that MSCI’s Emerging Market Currency Index hit a record in July and is on track for its best year since 2017, with a gain of more than 6 percent so far.
Traders, fund managers and analysts mostly expect this trend to extend into next year as a more volatile and weakening US dollar pushes investors to rethink how much US dollar exposure they hold and “question long-held assumptions about the direction and standing of the greenback.”
From a cycle perspective, Jonny Goulden, head of EM Fixed Income Strategy Research at JPMorgan, told Reuters that “the cycle of what we would call a bear market for EM currencies, which has lasted for 14 years now, has likely turned.”
He tied that shift to “this turn in the dollar cycle, where the world owns a lot of US assets and has avoided EM assets.”
Reuters reports that investors are looking for better value across markets from South Africa to Hungary as they diversify away from US assets.
Volatility remains the key risk to these returns.
Bloomberg notes that a JPMorgan gauge of emerging‑market currency volatility over the next six months is trading near its weakest level in five years.
That supports carry, but it also raises the risk that a sudden reversal could quickly erode gains.
“Volatility is very low in a lot of places,” said Francesca Fornasari, head of currency solutions at Insight Investment, in comments reported by Bloomberg. “That’s my only worry, that the benign story is to some degree in the price.”
Policy and politics could change the picture.
According to Bloomberg, Bank of America currency strategists led by Adarsh Sinha point to the US midterm elections and diverging central‑bank policies as potential drivers of higher currency swings in the coming months.
At the same time, Vanguard expects the turmoil tied to US President Donald Trump’s April tariff announcement to stay contained in 2026.
“We don’t see enormous bouts of volatility associated with policy instability or recessionary risks,” said Roger Hallam, Vanguard’s global head of rates, adding that such conditions tend to favour emerging‑market currencies.
Not every emerging‑market currency has participated.
Reuters says anaemic trade and investment flows pushed India’s rupee to record lows, while concerns about central‑bank independence and political unrest hurt Indonesia’s rupiah.
Still, traders are pricing in two more quarter‑point rate cuts by the US Federal Reserve next year, a backdrop that has already encouraged inflows to emerging‑market currencies and bonds and has supported carry trades.
Mexico’s peso and Brazil’s real are among the best‑performing emerging currencies this year, backed by what Reuters describes as prudent central banks, high interest rates — in Brazil’s case at a two‑decade high of 15 percent — and liquid currency and bond markets.
