Emerging-market currencies are raking in their strongest returns in over ten years after beating the U.S. dollar across the board in 2025, according to data from Bloomberg.
The rally has been fueled by a mix of looser policy from the Federal Reserve , defensive monetary positions from developing countries, and massive appetite for the carry trade.
The trade, which just means shorting the dollar to buy higher-yielding currencies, is up more than 10% this year. And while some say the momentum is overdone, others argue there’s more upside left before things get ugly.
Luis Costa, head of emerging-market strategy at Citi, said the trade isn’t done just yet. “A more pro-actively dovish stance from the Federal Reserve, combined with caution from emerging-market central banks, will continue to bolster developing-world currencies against the dollar,” he said.
That mix has created one of the most attractive global currency setups in memory.
Brazil’s real soars as carry trade hits biggest gain since 2017
The Bloomberg carry trade index, which tracks strategies involving borrowing in low-yielding dollars and investing in eight emerging-market currencies, has surged past 10% this year. That makes it the biggest annual jump since 2017.
Brazil’s real leads the pack with a gain of over 20%, outperforming every peer on the list. Luis said Citi is still bullish on the currency and pointed to the central bank’s neutral-to-tight stance as a key reason.
“The average EM central bank stance is also very cautious—pretty much neutral in many jurisdictions—which continues to suggest the sustainability of real policy rates,” Luis said. He added that traders are also pricing in expectations of a softer Fed in 2026. “Putting all this together, the mix still supports a well-behaved dollar, despite renewed appetite among international investors for U.S. equities.”
At the same time, the Bloomberg Dollar Spot Index has dropped 7.8% in 2025. That decline comes as Donald Trump’s administration moves forward with aggressive new tariffs. The chaotic rollout of those tariffs has triggered questions about the dollar’s stability and spooked currency markets.
The dollar may be due for a bounce back
Strategists at HSBC, including unnamed voices at the firm, have warned the nonstop wave of dollar selling might be a “bubble” about to pop. That would mean the dollar is nearing a bottom, although no reversal has happened yet.
But Citi isn’t just betting on Brazil. Luis and his team are also recommending long positions on the Turkish lira through 3-month forwards, another move driven by relative yield and central bank caution. Still, he flagged risks in the second half of 2026.
“Loose financial conditions and fiscal policy could push the U.S. economy from a soft landing into a rebound and reflation territory,” he said. If that happens, and Treasury yields rise again, he warned that emerging assets might start underperforming.
“In that potential scenario, marked by a steeper U.S. yield curve and a firmer dollar, international assets, including emerging markets, could find it far more challenging to perform,” Luis said.
Meanwhile, attention is turning to the Federal Reserve’s July meeting minutes, set for release at 2 p.m. Eastern. The Fed held rates steady during that meeting, but two senior officials, Christopher Waller and Michelle Bowman, broke ranks and dissented. It was the first time two voting members disagreed on policy since 1993.
The dissent comes just days ahead of comments expected from Fed Chair Jerome Powell on Friday. Investors are watching closely for signs of how far the Fed will go with rate cuts this year. Traders using CME’s FedWatch tool now see an 85% chance of a cut at the next meeting in September.
KEY Difference Wire helps crypto brands break through and dominate headlines fast
