The carry trade - a strategy that profits from buying higher-yielding currencies and funding those positions by shorting lower-yielding ones - is experiencing an unusually strong run, even as markets grapple with risk-driven swings. The combination of unusually wide rate gaps among developed economies, low currency volatility and a lack of a yen safe-haven lift amid the Iran war have made rate-based bets among Group of 10 (G10) currencies more attractive than they have been in years.
Citi calculates that a simple, unleveraged approach of buying the five G10 currencies with the highest policy rates and selling the five with the lowest would have returned just over 4% so far this year. That performance is notable given that, in aggregate, a developed-market carry trade has not been profitable since the global financial crisis, according to Kristjan Kasikov, head of FX quant investor solutions at Citi. "Since the global financial crisis it (a developed market carry trade) hasn’t made any money, so this uptick that we have seen is unusual," he said. "It’s quite remarkable in this year of uncertainty and shifting sentiment."
Rate differentials underpin the move
Large interest-rate differentials across developed economies are supporting demand for high-yielding G10 currencies. Australia and Norway are in tightening cycles, with policy rates above 4%. The United Kingdom’s policy rate sits just below that level, while Japan’s policy rate is under 1% and Switzerland’s stands at 0%.
Currency moves this year reflect those disparities. The Australian dollar has risen almost 9% versus the U.S. dollar so far this year and the Norwegian crown about 10%, while sterling is up roughly 1%. The yen has weakened, a trend exacerbated by high energy costs.
Market strategists note that sterling may be relatively stable against the dollar, but it faces competition from the Australian dollar and Norwegian crown as potentially superior carry options. Morgan Stanley expects sterling to prove stable against the dollar, but sees "increased competition from the Australian dollar and Norwegian crown as ’better’ carry expressions."
Broader investor participation
Carry strategies are being deployed by a spectrum of investors, not just short-term speculators. Stephen Jen, CEO and co-CIO of Eurizon SLJ Asset Management, highlighted low rates in Japan and China compared with the United States and said: "Carry trades in FX have been popular. It’s not just short-term traders, but the yield differentials are wide enough for long-only and corporate treasurers to capitalise," adding that he would not comment on his own positioning.
Kaspar Hense, senior portfolio manager at RBC BlueBay Asset Management, said positions have been long the Australian dollar and the Norwegian crown, in part because both countries are commodity exporters and have benefited from rising raw material prices. A conventional long position anticipates the asset will appreciate in value.
Calmer currency markets help returns
One reason carry trades are outperforming is lower currency volatility. Volatility can erase carry gains if exchange-rate moves outweigh interest-rate returns. Currency markets have been relatively calm even as energy prices climbed and government bond markets sold off in response to the Iran war.
Investors suffered in 2024 when a sudden yen surge during what had been a quiet summer wiped out carry trades and triggered a drop in equities. Today, a technology-led rally in equities is helping to keep both equity and currency volatility subdued. Three-month volatility for the euro/dollar pair, the world’s most traded currency pair, is about 5.6%, down from a March peak of 7.8%. That metric topped more than 9% during April 2025’s tariff shock and exceeded 12% during June 2022’s period of rapid central-bank rate increases. Dollar/yen volatility is also at relatively low levels.
While recent Japanese intervention has supported the yen, traders used higher levels as an opportunity to sell the currency, and the moves have not significantly damaged carry returns. Citi’s Kasikov noted: "The breakdown of the defensive properties of the yen meant while risk aversion spiked in March, that did not really dent the performance of carry trades where historically it may have."
The hedging dynamic
Traditionally, the yen and Swiss franc have been common funding currencies for carry trades, with investors borrowing cheap yen or francs to finance positions in higher-yielding assets. But high-yielding G10 currencies present a more nuanced picture.
UBS FX strategist Alvise Marino cautioned that the boost to the Australian dollar is not purely the product of classic carry strategies. "An investor who is trying literally to earn the interest rate differential between the two currencies is more likely to buy something like Brazil’s (real) or South Africa’s (rand)," Marino said. Instead, he argued, G10 rate differentials have changed the hedging calculus for foreign owners of U.S. assets.
Because rising domestic rates in places like Australia make hedging U.S. dollar exposure cheaper, holders of U.S. assets in those jurisdictions can protect themselves at a lower cost and still achieve a positive return. That dynamic has encouraged higher hedge ratios among Australian pension funds, providing additional flow into the Australian dollar. "This is a different type of carry trade compared to the one that we usually think about," Marino said.
Societe Generale’s chief FX strategist Kit Juckes underscored the point for foreign owners of U.S. assets: "The challenge for foreign owners of U.S. assets is the cost of hedging FX exposure." He added that currencies with lower hedging costs, helped by comparatively higher domestic rates, have performed well. "No surprise then, the currencies with the lowest hedging costs, thanks to domestic rates, are doing OK," he said, flagging the Norwegian and Australian currencies.
Implications for markets
The current environment - broad rate dispersion, muted currency volatility and hedging-driven flows - has reopened opportunities for carry strategies within the G10 bloc. That has attracted hedge funds, long-only managers and corporate treasurers, and has been reinforced by flows from institutional investors such as pension funds who are adjusting hedge ratios. The result is a renewed focus on rate-based FX positioning among developed-market currencies.