Emerging-Market Carry Trades Thrive Amid Weak Dollar and Rate Differentials

Emerging-market carry trades are delivering their strongest returns since 2009, fueled by low FX volatility and a weakening US dollar. The strategy has yielded 17% this year, with Brazil and Colombia leading gains as their currencies surged over 13% against the dollar.

Asset managers including Vanguard, Invesco, and Goldman Sachs anticipate persistent rate gaps between developed and emerging economies. The Federal Reserve's dovish stance and a 7% decline in the dollar in 2025 have created ideal conditions for borrowing in low-yield currencies and investing in higher-yielding alternatives.

Market participants now watch the US economy for cues. A soft landing could extend the dollar's slide and boost carry trade profitability, while a recession or overheating might disrupt the trend. 'With a weakening US dollar, carry should remain a source of return,' notes Invesco's Wim Vandenhoeck, highlighting opportunities in the Brazilian real and other high-yield EM currencies.