Playbooks for emerging-market carry trades are getting redrafted as favored funding currencies gear up for gains, threatening to eat into investors’ returns.
The European Central Bank made a hawkish pivot this month and will likely deliver its first rate increase in more than a decade sometime in 2022. That’s driving fresh strength in the euro, which has long been a favorite funding currency. Meanwhile, growing expectations that the Federal Reserve will have to lift interest rates as many as seven times this year to control soaring consumer prices are putting fire in the belly of the dollar. Even the yen has rallied off tension between Russia and Ukraine, which deepened on Friday.
