The currency-market carry trade is back - and bigger than it's been in many years
The Japanese Yen remains one of Goldman Sach's preferred funding currencies.
After a big blowup in the summer of 2024 that sent global stocks reeling, the currency-market carry trade has made a big comeback.
The currency carry trade, which seeks to profit from differences between countries' interest rates by borrowing a currency with a low interest rate and investing in a currency with a higher rate, has become more relevant to the broader market than at virtually any other point since 2000, according to Stuart Jenkins, a strategist at Goldman Sachs.
The reason? An unusual combination of wide interest-rate gaps and subdued currency volatility, Jenkins wrote in a Thursday report.
The favorable setup could make currency carry more useful beyond traditional currency-market participants. The strategy might seem especially appealing after a strong run in U.S. stocks has pushed the S&P 500 SPX near record territory, leaving many portfolios heavily exposed to equities. Some currency trades now offer the potential to collect interest-rate income while remaining relatively insulated from broader market declines, giving sophisticated investors another way to generate returns without adding more exposure to stocks, acording to Jenkins.
"We view the opportunity to earn carry in G10 FX while remaining relatively insulated from (or even hedged against) drawdowns in risk as a useful option in multi-asset portfolios in the current backdrop," Jenkins wrote.
The biggest risk to a carry trade's profits is volatility. If the currency that the investor borrowed to fund the trade rises sharply - or the currency they have chosen to invest in weakens - it could saddle them with losses or force them to close the position.
Interest-rate differentials have been key drivers of the currency market this year. According to Goldman's analysis, 70% of the variation in first-half total returns across the major dollar currency pairs was driven by interest rates.
The chart below shows, for each year since 2000, how closely carry returns were related to total returns across major currency pairs against the U.S. dollarDXY. A taller bar indicates a stronger relationship between carry and overall performance in that year. The 2026 year-to-date reading is about 0.70, one of the highest in the period shown.
Meanwhile, major developed-market currencies are offering an unusually attractive mix for carry trades: relatively high interest-rate income and comparatively low volatility, according to Goldman. The backdrop reflects the high and widely varying policy rates across G-10 economies following the post-COVID-19 inflation surge and, more recently, the Middle East energy shock.
Expectations for relatively limited central-bank policy changes have also helped keep interest-rate gaps more stable and currency swings subdued, even as the potential income from carry remains elevated, Jenkins noted. Goldman said the amount of carry available relative to expected volatility in trades such as U.S. dollar-Canadian dollar and euro-Swiss franc is now close to multidecade highs.
The setup is especially notable as historically currency trades offering the greatest carry relative to volatility have also tended to be the most sensitive to stocks and global risk appetite. That means carry trades often perform well when markets are calm but can unwind sharply when investors become fearful.
That relationship has broken down in recent months, Goldman said. Its analysis found virtually no connection in 2026 between a currency pair's carry relative to expected volatility and its sensitivity to the S&P 500, compared with a clear positive relationship over the longer period since 2000.
The first chart below compares the long-term average carry available relative to volatility for major currency pairs with how sensitive each pair has been to moves in the S&P 500 from 2000 through 2026. Each dot represents one currency pair. The upward-sloping trend line shows that pairs offering more carry relative to volatility have historically also tended to be more exposed to swings in risk assets.
Carry-to-vol across FX pairs typically exhibits a clear positive relationship with the pairs' beta to risk
This next chart makes the same comparison using current carry-to-volatility levels and each pair's sensitivity to the S&P 500 in 2026. Unlike the long-term chart, the trend line is nearly flat and the R(2) is zero, showing that higher-carry trades this year have not consistently coincided with greater stock-market sensitivity.
This relationship has broken down in recent months, providing useful opportunities for harvesting carry in risk-neutral or even risk-off expressions
Goldman's preferred funding currencies for these trades include the Japanese yen(USDJPY), Swiss franc(CHFUSD), euro(EURUSD) and Canadian dollar(CADUSD), Jenkins noted. A funding currency is one that investors sell or borrow to finance the purchase of a higher-yielding currency.
-Frances Yue
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(END) Dow Jones Newswires
July 10, 2026 15:04 ET (19:04 GMT)
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