Emerging Market Currencies Hit Record Highs as Carry Trade Rebounds
Miles Bennett
The MSCI emerging-market currency index touched an all-time high intraday and is set for a sixth straight weekly gain against the dollar; Citi says the carry-trade 'magnet' is back, with Brazil, Mexico and Colombia the top beneficiaries.
Why are EM currencies at a record?
The MSCI EM currency index rose 0.1% by London midday Thursday, hitting an intraday all-time high and tracking toward a sixth consecutive weekly gain against the dollar.
The dollar fell 0.2% this week, extending last week's 1.3% slide — a sustained weakening that has lifted EM currencies across the board.
This means → capital is flowing out of the dollar and into emerging markets systematically, not as a one-day blip but as a six-week trend.
What is the carry trade, and why is it back?
The carry trade — borrowing in a low-rate currency and buying a higher-yielding one to pocket the spread — is reviving. It is the core engine behind this EM currency rally.
Luis Costa, Citi's head of EM strategy, told Bloomberg TV the Fed will hold rates steady at its next meeting, a stance that will "push the dollar lower" and support EM carry.
In plain terms = the dollar's interest rate has stopped climbing, so borrowing dollars stays cheap; using those cheap dollars to buy high-yielding EM currencies becomes more profitable. Costa calls it a "carry magnet that is still there."
Which countries and currencies benefit most?
Costa names Brazil, Mexico and Colombia as the biggest carry-trade winners — all three offer rates well above the U.S., creating the widest spread.
Citi is also buying currencies of oil-importing nations — Egypt, Turkey and Central Europe — reasoning that falling crude prices cut their import bills.
In Asia, the Korean won led gains, reaching its strongest level since October, driven by exporters converting dollar revenues into won. The Thai baht rose 0.4% and the Taiwan dollar added 0.2%.
Why is the stock market falling instead?
In sharp contrast, the MSCI EM equity index dropped 1.6%, extending a soft patch that began in August.
The drag came from disappointing results at U.S. tech firms Sandisk and Western Digital, with negative sentiment spilling into Asian markets.
This reflects a split signal: capital likes the EM rate story (currencies) but remains cautious on the earnings story (equities).
What comes next?
Friday's U.S. non-farm payrolls report is the key test of whether the "sell America" trade gains fresh momentum.
This means → a weak jobs print could push the dollar lower still and turbocharge carry trades; a strong one could snap the six-week streak.
Markets are also pricing in expectations that new Fed chair Kevin Warsh will be in no rush to hike — together with falling oil prices, these form the two pillars of the "sell America" trade.
Content is for reference only, not financial advice.