Goldman Sachs: Carry Trade Makes Strong Comeback After 2024 Blowup

The currency market carry trade strategy, which led to a major market upheaval in 2024, is making a robust comeback, according to a report from leading investment bank Goldman Sachs. The bank indicates that current market conditions offer the most favorable environment for this strategy since 2000. This suggests that carry trades, which aim to profit by borrowing in low-interest currencies and investing in higher-yielding ones, are set to increase their influence in global financial markets once again.

The carry trade strategy seeks to capitalize on differences in interest rates between countries. Investors borrow in a currency with a low interest rate and invest in another currency offering a higher return. However, this strategy caused a significant market crisis in the summer of 2024, largely due to investors unwinding their carry trade positions, particularly those funded by the Japanese yen. According to Goldman Sachs strategist Stuart Jenkins, current market conditions present a highly attractive backdrop for carry trades, thanks to an unusual combination of wide interest-rate gaps and subdued currency volatility.

Goldman Sachs expects the Japanese yen, Swiss franc, and euro to remain preferred funding currencies in the coming months. The Japanese yen, in particular, is anticipated to remain the optimal funding currency in the long term, as it currently trades near a 40-year low against the dollar and could weaken further if macroeconomic conditions do not change, though the constant threat of intervention by Tokyo persists. The bank highlights promising carry trade opportunities in pairs such as the U.S. dollar against the Swedish krona (USDSEK), the euro against the Swiss franc (EURCHF), and the Australian dollar against the New Zealand dollar (AUDNZD).

This development is having a significant impact on currency markets. The carry trade has become more relevant to the broader market than at almost any other point since 2000. The strategy offers investors the potential to collect interest-rate income that is relatively insulated from broader market declines, serving as an alternative to the current high equity exposure in portfolios. According to Goldman Sachs' analysis, 70% of the variation in first-half total returns across major dollar currency pairs this year was driven by interest rates. G10 currency carry trades have delivered approximately 8% returns year-to-date in 2026, outperforming global bonds, gold, and Bitcoin, although trailing equity markets.

The resurgence of carry trades is closely linked to the persistent high and divergent policy rates across G-10 economies following the post-COVID-19 inflation surge and the Middle East energy shock. Expectations for relatively limited central bank policy changes have also contributed to more stable interest-rate gaps and subdued currency swings. This macroeconomic environment creates an ideal setting for carry trade strategies.

Analysts and market experts are closely monitoring the future performance of the carry trade strategy. Goldman Sachs cautions that while profits accumulate gradually, money can be lost in minutes due to exchange rate fluctuations, and a sharp spike in volatility could trigger an avalanche of position closures, intensifying market turmoil. Institutions like Barclays have warned that the current calm in foreign exchange markets appears inconsistent with elevated geopolitical and macroeconomic uncertainty, highlighting the risks of the strategy. Therefore, investors must carefully assess the potential impact of global economic and political developments on carry trades.