Weakening Dollar Fuels Carry Trade Revival, Accelerating Capital Flows into Emerging Markets
nashnova research
The US Treasury's expanded bond buyback programme has kept the dollar weak, reigniting carry trades — emerging-market bond funds took in $967 million last week alone, and analysts say this is only the beginning, with the trajectory hinging on US fiscal policy.
Why is the carry trade heating up again?
A carry trade — borrowing in a low-rate currency to buy higher-yielding assets — blows up when borrowing costs spike. The Treasury's expanded buyback effectively caps long-term rates, neutralising that core risk.
This means → the cushion for shorting the dollar and going long high-yield currencies just got thicker. Traders are re-entering the position.
Brookings senior fellow Robin Brooks notes that emerging markets saw massive outflows during the Iran war, so dollar-funded carry trades are only just getting started.
Where is the money going, and how much?
TD Securities data: in the week to last Wednesday, global EM bond funds recorded $967 million in net inflows — up roughly 15% from the prior week.
Since Treasury Secretary Bessent announced the buyback, the Korean won has gained 2.83% against the dollar, the Brazilian real 0.64%, and the South African rand 0.59%.
In plain terms = capital is migrating out of dollar assets into higher-rate emerging markets — and the pace is accelerating.
Which markets are carry-trade favourites?
Brazil: benchmark rate at 14%, 12-month inflation at 4.2% — one of the highest real rates among major economies.
Turkey: the central bank held its one-week repo rate at 37% in July, with annual inflation at 31.75% — extremely high nominal yield.
Colombia: BNY Mellon strategist Wee-Khoon Chong calls it "very popular" this year — the currency is up roughly 20% year-to-date, and the COLCAP equity benchmark has gained about 20% over the same period.
Among G10 currencies, Union Bancaire Privée's global FX strategy head Peter Kinsella favours the Australian dollar and Norwegian krone.
Why are Asian currencies lagging behind?
Standard Chartered chief strategist Eric Robertsen expects Asian currencies to keep underperforming their EM peers.
This means → Asian currencies generally offer lower implied yields, making them less attractive for carry. India's policy rate at 5.25% is among the highest in Asia — yet it is barely a third of Brazil's.
In plain terms = carry traders chase yield spreads, and Asia's spreads are not fat enough; capital naturally flows to Latin America first.
How long can this carry-trade wave last?
Kinsella argues that the favourable backdrop — low volatility and broadly falling inflation — remains "firmly in place."
But Brooks cautions: the buyback announcement signals that "bigger measures could come from more places over time." This reflects a deeper reality — the scale and duration of the carry trade depend heavily on the next moves in US fiscal policy.
In plain terms = the more aggressively Washington pushes rates down, the wider the carry-trade window opens; if policy reverses, that window could slam shut fast.
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