The Resurgence of Emerging-Market Carry Trades in 2026

The global financial landscape in 2026 is witnessing a seismic shift as emerging-market (EM) carry trades surge in popularity. This revival is driven by a confluence of factors: a weakening U.S. dollar, narrowing yield differentials between developed and emerging markets, and a synchronized easing cycle among global central banks. For investors, this represents a rare window of opportunity to capitalize on high-yielding EM currencies while mitigating risks through strategic positioning.

Dollar Weakness and the Easing Cycle

The U.S. dollar's relative decline in 2026 is a cornerstone of this carry trade resurgence. According to J.P. Morgan Global Research, most developed market central banks are expected to conclude their easing cycles by mid-2026, while the Federal Reserve remains on a more aggressive path of rate cuts. By March 2026, the Fed's terminal rate is projected to fall to 3.25% from its current 4.0%. This divergence creates a fertile environment for EM carry trades, as investors borrow in low-yielding dollars and deploy capital into higher-yielding EM assets.

The dollar's weakness is further amplified by reduced hedging flows and AI-driven equity inflows into the U.S., which, while supporting the dollar in some segments, fail to offset broader structural trends. Cambridge Currencies forecasts the Dollar Index (DXY) to drift toward the low-90s by late 2026, assuming no major global shocks. This trajectory aligns with Bloomberg data showing the dollar losing over 7% in 2025, a trend expected to continue.

Yield Differials: The EM Advantage

Yield differentials between developed and emerging markets are widening, making EM currencies increasingly attractive. For instance, the U.S.-Japan rate gap has historically fueled carry trades, but in 2026, the focus is shifting to EM economies like Brazil, Turkey, and South Africa. These markets offer policy rates exceeding 10%, 8%, and 8.5%, respectively, creating a stark contrast with the Fed's 3.25% terminal rate.

RBC Capital Markets highlights the narrowing U.S.-Canada rate differential as a microcosm of broader trends, while ING's FX Outlook notes that EM currencies with strong fundamentals-such as the Indian rupee and Chinese yuan-are gaining traction due to supply chain diversification and stable yield spreads according to ING's FX Outlook. The eurozone's slower growth and the Bank of England's fiscal risks further reduce competition for capital, leaving EM markets as the primary beneficiaries according to Convera.

Case Studies: Brazil, Turkey, and South Africa

Brazil has emerged as a top carry trade destination in 2026. Portfolio Adviser reports that the Brazilian real appreciated over 13% against the dollar in 2025, driven by high interest rates (10.75% as of Q3 2026) and political optimism ahead of the 2026 elections. Investors are betting on improved fiscal discipline and infrastructure reforms, which could attract sustained capital inflows.

Turkey and South Africa are also standout performers. The Turkish lira's resilience-despite its reputation for volatility-stems from aggressive central bank interventions and a 8.5% policy rate. Similarly, South Africa's rand has benefited from a 8.25% benchmark rate and a rebound in local currency bond indices. Both markets exemplify how EM carry trades can thrive when macroeconomic stability and policy credibility align.

Capital Flows and Investor Strategies

Capital inflows into EM assets are accelerating. J. Safra Sarasin predicts renewed inflows in 2026, citing a "favorable macroeconomic environment" and policy shifts. Vanguard Group, Invesco, and Goldman Sachs have all increased exposure to EM currencies, with a Bloomberg carry trade index returning 17% in 2025-the highest since 2009.

Investors are adopting a dual strategy: hedging against dollar volatility while leveraging high-yield EM bonds and equities. For example, local currency EM bond indices delivered double-digit returns in 2025, with the Egyptian pound and Nigerian naira outperforming. This trend is expected to continue as global capital realocates away from overvalued U.S. equities.

Risks and Caution

While the outlook is bullish, risks persist. Political volatility in EM markets-such as Brazil's election uncertainty or Turkey's fiscal challenges-could trigger sudden reversals. Additionally, a sharp U.S. rate hike or a global liquidity crunch could reignite dollar demand, compressing carry trade margins. Investors must balance yield-seeking with diversification and hedging to mitigate these risks.

Conclusion

The 2026 resurgence of EM carry trades is a testament to the power of yield differentials and dollar weakness. As central banks navigate easing cycles and EM economies strengthen their fundamentals, the window for strategic capital deployment is widening. For investors willing to navigate the risks, this is a pivotal moment to capitalize on the next frontier of global finance.