Key Takeaways
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- The U.S. dollar is regaining global investor appeal, challenging the “Sell America” narrative.
- Dollar carry trades—borrowing in low-yield currencies like the yen or Swiss franc to invest in dollar assets—are now outperforming equities and bonds when adjusted for volatility.
- A record drop in the dollar’s volatility, partly due to the government shutdown, has boosted carry trade attractiveness.
- Despite a weak year for the dollar, it has rebounded 3% from September lows, signaling renewed strength.
- The carry trade remains vulnerable to future Fed rate cuts or shifts in inflation expectations.
Dollar Regains Global Crown
The dollar is reasserting itself as one of the world’s most powerful assets, confounding expectations of a prolonged decline. A Bloomberg analysis shows that carry trades funded by low-yielding currencies—such as the Japanese yen or Swiss franc—are now generating stronger risk-adjusted returns than global equities or government bonds.
Even after losing nearly 7% this year, the dollar has clawed back around 3% since September. Strategists say this rebound, fueled by carry flows, will likely keep the greenback strong into 2026.
“The dollar will end up being one of the highest carry currencies again,” said Yuxuan Tang, strategist at JPMorgan Private Bank. “Whether from a directional or carry perspective, it’s still going to be about a strong dollar.”
Why Carry Trades Are Back in Favor
The mechanics are straightforward: investors borrow in currencies with near-zero rates, such as the yen or franc, and reinvest in higher-yielding U.S. dollar assets. The trade thrives when exchange-rate volatility stays low—something the recent U.S. government shutdown helped reinforce by dampening global market swings.
Bloomberg’s models show that dollar carry trades now deliver about 0.54% return per unit of volatility, compared with only 0.23% for Chinese equities and even less for Japanese stocks.
“With yield differentials still wide and funding trades profitable, the carry trade is back in favor,” said Nour Al Ali, Bloomberg strategist.
Stock Markets Show Cracks
The resurgence of carry trades coincides with growing skepticism about stretched equity valuations. The S&P 500 has surged more than one-third from its April lows, but risk premiums have vanished. The index’s earnings yield now trails the 10-year Treasury yield, meaning U.S. stocks no longer compensate investors for additional risk.
Markets in Europe and China show similar compression in returns relative to volatility. As a result, capital is shifting back toward dollar-denominated debt and short-term yield plays.
Fed Policy the Wild Card
The bullish dollar thesis hinges on the Federal Reserve’s next moves. A faster-than-expected rate-cut cycle would erode the carry advantage, while sustained inflation above target could extend it.
“With inflation at 3% and the Fed still cautious, the dollar remains an attractive carry asset,” said Jacky Tang, Deutsche Bank CIO for emerging markets. Wells Fargo strategist Aroop Chatterjee added, “Dollar carry trades may remain appealing as long as the macro backdrop stays resilient.”
Still, any shift in rate expectations—or a spike in volatility—could unwind the trade quickly, reminding investors of how fragile carry booms can be.
The Bottom Line
The dollar’s comeback underscores a broader truth: in uncertain times, yield, liquidity, and stability still dominate investor behavior. As global stock markets grow frothy and central banks diverge on rate paths, the greenback’s carry advantage once again looks like the safest way to earn returns in a volatile world.
