Dollar carry trades hit longest winning streak since 2008

Investors borrowing in US dollars to chase higher yields in emerging markets have racked up their longest winning streak since the 2008 financial crisis, a run underpinned by unusually subdued currency volatility and wide interest-rate differentials that show few signs of narrowing.

A Blockbuster Run

Bloomberg's eight-currency index tracking dollar-funded carry trades — where investors borrow cheaply in dollars and deploy capital into higher-yielding emerging-market currencies — posted an 18% gain in 2025, the strategy's best annual performance since 2009. The momentum has extended into 2026, with the index already up 1.3% by late January and continuing to climb through the summer.cryptobriefing

Cathy Hepworth, who heads PGIM's Prudential Financial, Inc. ↘ 2.63% emerging-markets debt team overseeing $1.5 trillion in assets, described her highest-conviction theme in three words: "Carry, carry, carry". The trade's appeal is straightforward — Turkish lira bonds, for example, offer yields as high as 40%, dwarfing the cost of dollar borrowing.bloomberg

Perhaps the most striking feature of the current environment is the volatility picture. Emerging-market currencies have exhibited lower volatility than G7 currencies for nearly 200 consecutive days, a streak that if maintained would be the longest since 2000. Goldman Sachs ↘ 0.36% noted in July that G10 carry-trade conditions were at their most favorable since 2000, while Morgan Stanley ↘ 0.53% and Bank of America ↘ 0.68% have both pointed to sustained capital inflows as primary fuel for the rally.bloomberg+1

What Could End It

The history of carry trades offers a cautionary template. The 2008 crisis, the 2013 taper tantrum, and the August 2024 yen carry trade unwind all followed the same pattern: steady gains accumulated over months, then evaporated in days when volatility spiked.wellington+1

Changes in Federal Reserve policy expectations remain the largest wildcard. If US rates move in a direction that narrows the yield gap between dollar funding costs and emerging-market returns, the incentive to borrow and invest abroad shrinks quickly. Recent interventions related to the yen have introduced some fluctuations without derailing the broader trend.cryptobriefing

Still, analysts from Morgan Stanley and Bank of America have expressed confidence that, absent unforeseen macroeconomic shifts, current conditions should persist through the remainder of 2026. The global economy's unexpected resilience — even amid the oil shock spurred by geopolitical tensions — has suppressed market swings and buoyed risk appetite among traders seeking out lofty yields in developing nations.bloomberg+1