Investors selling the dollar to buy emerging-market currencies are off to a lucrative start to 2026, with strategists at top banks expecting such strategies to build further on last year’s 18% rally.
Carry trades — where fund purchases in higher-yielding currencies with currencies that are cheaper to borrow — are already up 1.3% this year, according to a Bloomberg index tracking returns across eight emerging markets. With President Donald Trump’s policies weighing heavy on the dollar, strategists at Morgan Stanley, Bank of America Corp. and Citigroup Inc. reckon last year’s returns, the biggest since 2009, are about to extend.
The index stands above 291 on Monday, about 5% shy of the record hit in 2011, with currencies from the South African rand to Colombian peso hovering at multi-year highs.
But aside from currency strength, carry strategies are also benefiting from high real interest rates in the developing world. Policymakers in many developing countries are only gradually easing policy, despite signs of slowing inflation.
“For carry trades, we are looking at countries where monetary policy is tight and central banks are considered credible,” said James Lord, Morgan Stanley’s head of emerging-market strategy. The Brazilian real, Turkish lira, and Czech koruna are his preferred trades for this year.
Trades focused on Latin American currencies are among the top performers. The Brazilian real, for instance, has already returned 4.3% so far in 2026, building on last year’s 23.5%. The country’s interest rates are at 15% even though inflation has slowed toward the central bank’s target range.
Citi strategists too are among those recommending buying the real against the dollar, though they also favor the Turkish lira.
The Indian rupee, last year’s worst performer, is extending those losses this year and is down about 2% in carry terms. The Indonesian rupiah has also put investors in the red.
The record year for carry strategies was 2003 with a 25% return, the Bloomberg index shows. But to enjoy that kind of bumper year, investors will need the dollar to continue weakening, and emerging-currency swings to stay subdued. They will likely keep a close eye on JPMorgan Chase & Co’s volatility gauge, which is at a three-week high after a prolonged spell of calm.
BofA strategist Alex Cohen expects carry trades to continue outperforming, but only if volatility stays suppressed.
“That’s a big ‘if’ as we sit here today” Cohen said, noting the possibility of geopolitical flare-ups.
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