Currencies
Reverse Carry Trade Sees Dollar Bets Funded by EM Currencies
- Investors begin using emerging-market currencies for funding
- Reverse carry has produced returns of as much as 9% this year
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For decades, carry traders have borrowed US dollars at low interest rates and invested in higher-yielding emerging-market currencies. But that flow is now getting turned on its head.
The Federal Reserve’s tight monetary stance has extended for so long that some emerging economies are struggling to keep their yields competitive, making them the target of a so-called reverse carry trade. That trade is paying off. Borrowing in emerging-market currencies and buying the dollar has produced returns of as much as 9% this year.