Carry Trade
Borrowing in a low-interest-rate currency to invest in a higher-yielding currency, profiting from the rate differential.
What is Carry Trade?
A carry trade is a currency strategy that involves borrowing in a currency with a low interest rate (the funding currency) and using the proceeds to invest in assets denominated in a currency with a higher interest rate (the target currency), profiting from the interest rate differential — known as the "carry." The most classic carry trade has historically involved borrowing in Japanese yen (low rates) and investing in Australian dollars or emerging market currencies (higher rates). Carry trades can be highly profitable in stable markets but are vulnerable to sudden reversals: when risk appetite falls, investors rapidly unwind positions, causing the funding currency to appreciate sharply and generating large losses.
Example
During 2022–2023, a popular carry trade involved borrowing in Japanese yen (near-zero Bank of Japan rates) and investing in US dollars (5%+ Federal Reserve rates), earning the roughly 5-percentage-point interest differential. When the Bank of Japan unexpectedly raised rates in July 2024, a massive yen carry trade unwind contributed to a global equity selloff.
Source: Bank for International Settlements — FX and Carry Trades