Carry trades funded by the dollar hit longest winning streak since 2008

The oldest trick in the currency trader’s playbook is working better than it has in almost two decades. Dollar-funded carry trades, where investors borrow in US dollars and park the proceeds in higher-yielding emerging-market currencies, have strung together their longest winning streak since 2008.

The numbers behind the streak

Bloomberg’s eight-currency index tracking these trades posted an 18% gain in 2025, the strategy’s best annual performance since 2009. To put that in perspective, an 18% return on a currency carry trade is the kind of result that usually only shows up when everything breaks right: wide interest-rate differentials, calm markets, and a weakening funding currency.

The momentum has carried into 2026. As of late January, the index was already up 1.3% year-to-date.

Perhaps the most striking data point 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.

Why the dollar became everyone’s favorite piggy bank

Major institutions have piled in. Morgan Stanley and Bank of America have both pointed to favorable macroeconomic conditions, specifically those interest-rate differentials and sustained capital inflows into emerging markets, as the primary fuel for the rally. Goldman Sachs noted that G10 carry-trade conditions were at their most favorable since 2000, benefiting not just EM plays but also G10 trades involving currencies like the yen and Swiss franc.

Capital inflows into emerging-market assets have accelerated across 2025 and into 2026, reaching the fastest pace seen since 2019 by various measures.

What could break it

The uncomfortable truth about carry trades is that they tend to unwind violently. Returns accumulate slowly over months, then evaporate in days when volatility spikes. The 2008 financial crisis, the 2013 taper tantrum, and the August 2024 yen carry trade unwind all followed the same pattern: long periods of steady gains punctuated by sudden, sharp reversals.

Recent interventions related to the yen have introduced some fluctuations, though without significantly derailing the broader momentum. Changes in expectations around Federal Reserve policy remain the biggest wildcard. If the Fed surprises with a hawkish pivot or if US rates move in a direction that narrows the yield gap, the incentive to borrow in dollars and invest abroad shrinks quickly.

Analysts from Morgan Stanley and Bank of America have expressed confidence that, absent unforeseen macroeconomic shifts, current trends should persist through 2026.