Dollar Down, Emerging Markets Up: Citi’s Carry Trade Party Isn’t Over Yet

If you’ve been betting on emerging-market currencies to beat the dollar this year, congratulations—you’ve been riding one of the hottest trades of the decade. And according to Citi’s top strategist, that rally isn’t done partying just yet.

Luis Costa, Citi’s head of emerging-market strategy, says there’s still juice left in the carry trade—a strategy that’s been paying off handsomely for those borrowing in low-interest-rate currencies (like the U.S. dollar) and investing in high-yielding ones across the developing world.

The secret sauce? A double-shot of dovishness from the Fed and discipline from emerging-market central banks. While Jerome Powell and company are signaling a gentler path ahead, their counterparts in the developing world are playing it safe, keeping rates steady and inflation in check.

That’s created a sweet spot: currencies like Brazil’s real are flexing hard, up more than 20% against the dollar this year. And a Bloomberg index tracking carry-trade returns from eight EM currencies—backed by short dollar positions—is already up more than 10%, eyeing its biggest yearly surge since 2017 .

“The average stance of EM central banks is cautious—basically neutral,” says Costa. “That suggests real rates remain attractive, and with expectations of an even more dovish Fed in 2026, it’s a solid environment for emerging currencies.”

Meanwhile, the U.S. dollar has been wobbling. The Bloomberg Dollar Spot Index is down 7.8% this year, tripped up by trade tariffs and political noise. Some analysts, including HSBC’s team, are already whispering the “B-word”—bubble—as they warn that dollar selling might be getting overdone .

But Citi’s still bullish on EM—at least for now. They’re doubling down on Brazil and even recommended Turkish lira plays via 3-month forwards last month. The caution? Don’t get too comfortable.

Costa warns the music could fade in the second half of 2026. If U.S. fiscal policy keeps the money flowing and the economy rebounds into reflation, things might shift fast. That scenario—steeper U.S. yields and a stronger dollar—could spell trouble for international assets, especially the EM crowd.

​But until then? This carry trade train is still chugging—and there’s a little more track left to run.