Dollar carry trades set to trounce world’s booming stock markets.

By Jerry  Published On November 11, 2025

The dollar is regaining its crown as one of the world’s most appealing assets, defying talk of a “Sell America” trade that had raised troubling questions about the outlook for the global reserve currency.

A simple strategy of borrowing in low-yielding currencies like the Japanese yen or the Swiss franc and putting your money in dollars looks set to beat the implied returns on markets such as European stocks and Chinese government bonds once the volatility of these assets is taken into account.

That suggests the dollar will maintain its critical position in global portfolios, despite worries about its future this year as President Donald Trump shook up the global economic order. A Bloomberg gauge of the dollar is down almost 7% this year — its worst performance in eight years — but it has bounced back around 3% from a September low, in part because of the so-called carry trade.

“The dollar will end up being one of the highest carry currencies again,” said Yuxuan Tang, a strategist at JPMorgan Private Bank in Hong Kong. “Whether it’s from a directional or carry perspective, it’s still going to be about a strong dollar,” she said.

The implications of the dollar’s renewed appeal for investors can’t be overstated for global markets.

Carry trades can drive massive capital flows, reshaping asset values and influencing sentiment from New York to Singapore. When investors borrow cheaply to chase higher returns elsewhere, liquidity is often amplified — fuelling rallies in risky assets that can just as quickly unravel when volatility spikes.

The appeal of dollar carry has been helped by a sharp drop in the greenback’s volatility, in part because a prolonged government shutdown dampened price swings in the US$9.6 trillion (RM39.8 trillion)-a-day global foreign exchange market. That reduces the risk for foreign traders loading up on dollar assets without hedging their currency exposure.

To make the calculations, earnings yields as a proxy for equity returns; the gap between borrowing rates in yen and Swiss francs and similar-maturity investment yields in dollars to estimate the carry; and bond indexes that capture a range of maturities for yields on government debt. Volatility was calculated for the next month, with option-implied measures used for the currencies and stocks and swaptions for bonds. The exception was in China and emerging-market debt, where realised volatility was used.

Investors could also get equity returns wildly at odds with earnings yields, which are calculated by dividing earnings per share by the stock price. Although research has found that earnings yields have predictive value for stock returns, short-term market moves can be chaotic — something that few investors need telling after such an unpredictable year.

Still, there’s plenty of hope for dollar bulls looking to ramp up long-dollar carry strategies into 2026.

US inflation of 3% in September, well above the Fed’s 2% target, remains a sticking point for some officials. Fed official Austan Goolsbee recently expressed nerves about inflation, adding that he wants to see more data before deciding how to vote at the Fed’s December meeting. If strong data continues, a slower pace of easing could protect carry returns into next year.

Source: Theedgemalaysia


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