Carry Traders Ditch Dollar for Euro, Aussie in EM Bets
Carry traders are shifting funding away from the US dollar to currencies like the euro and Australian dollar for emerging-market bets, as the dollar strengthens and reduces carry returns.
Carry traders are increasingly shifting away from the US dollar to fund emerging-market bets, turning instead to currencies such as the euro and Australian dollar. This rotation comes as the US dollar strengthens, eroding the returns of traditional dollar-funded carry trades.
The shift reflects a broader recalibration in global currency markets. When the dollar appreciates, the cost of borrowing in dollars rises, squeezing the net yield from carry strategies that involve selling low-yielding currencies to buy higher-yielding emerging-market assets. By switching to alternative funding currencies like the euro or Australian dollar, traders seek to preserve carry returns. This dynamic can influence equity flows, as emerging-market stocks often benefit from increased foreign investment when carry trades are active. Live stock prices and charts on NowPrice show how these currency moves correlate with emerging-market equity performance.
Looking ahead, traders will monitor central bank policy divergences. If the Federal Reserve maintains a hawkish stance while the European Central Bank or Reserve Bank of Australia signal dovishness, the dollar could remain strong, further discouraging dollar-funded carry. Key data releases include US inflation prints and EM central bank rate decisions, which will shape the relative attractiveness of these trades. The sustainability of this shift will also depend on global risk appetite and commodity prices, given the Australian dollar's sensitivity to China demand.