Carry Trade Shift: Fund Managers Ditch Dollar, Switch to Euro and Aussie Dollar for Funding
Claire Weston
Invesco, AllianceBernstein and peers are swapping the dollar for euros, aussie dollars and other currencies to fund emerging-market carry trades, as dollar strength has become EM investors' top risk — a hedge, not a bearish bet.
What is a carry trade, and why does the funding currency matter?
The logic is simple: borrow in a low-rate currency, buy a high-rate one, pocket the spread.
When U.S. rates were low, borrowing dollars to buy Brazilian reais or Turkish lira was the standard play.
This means → if the funding currency rallies, FX losses can wipe out the interest-rate gain — what you borrow matters as much as what you buy.
Who is switching, and to what?
AllianceBernstein's EM debt head Christian DiClementi: "We're not funding high-carry currencies through the dollar — we're turning to the rest of the world."
Invesco has diversified funding into euros and Canadian dollars, and to a lesser extent yen, across several strategies.
Morgan Stanley recommends a dollar + euro + yen basket instead of dollar-only funding; Citi is pitching long real versus the euro and the aussie.
In plain terms = instead of borrowing from one lender, managers now borrow from several and pick whoever is cheapest.
Why has dollar strength become the number-one worry?
New Fed chair Kevin Warsh has struck a hawkish tone → markets expect U.S. rates to stay elevated, supporting the dollar.
An HSBC survey of 101 institutions managing a combined $432 billion in EM assets found dollar strength has overtaken geopolitics as the top concern.
This means → sticking with dollar-only funding leaves the entire carry return exposed if the dollar rallies again.
Are carry trades still profitable right now?
Since President Trump announced broad tariffs in April 2025, a dollar-funded basket of reais, pesos and lira has returned 26%.
Colombia and Brazil offer the highest real rates in EM; both currencies have gained at least 5% against the dollar this year.
This reflects a market where the carry itself is lucrative — the problem is not the return but the funding-side FX risk.
Some managers disagree — where is the split?
Fidelity's Cathy Hepworth keeps a dollar-long bias, using yen funding only selectively — she is more confident in the dollar.
DoubleLine's Bill Campbell calls diversification sensible but warns against closing dollar funding entirely, given an uncertain Fed path.
His words: "A sharply stronger dollar is far from a done deal — what if Warsh decides to delay a hike until December?"
What does this mean for markets?
Multiple investors stress: diversifying the funding leg is risk management, not a directional bet against the dollar.
Vontobel's Thierry Larose notes that a disorderly dollar surge is the key risk, but aggressive U.S. trade policy should cap dollar upside and reduce the odds of an extreme move.
In plain terms = the second-half question is whether funding diversification actually hedges dollar risk — or amplifies EM volatility if the dollar truly rips higher.
Content is for reference only, not financial advice.