After years of relative calm in the foreign exchange markets, carry trades and currency volatility have stormed back into the spotlight in 2025. With interest rate differentials widening across the globe and central banks diverging in their monetary strategies, forex traders are re-entering the carry trade space—eager to exploit yield gaps while navigating the increased turbulence in currency markets.
But the return of carry trades is not just about chasing higher returns. It’s a signal of shifting macroeconomic tides, rising geopolitical risks, and a global financial environment that is once again favoring active forex positioning over passive currency hedging. For traders, the message is clear: volatility is opportunity—but only if you know how to manage it.
This article breaks down what carry trades are, why they’re making a comeback, and what today’s traders need to know to stay ahead in an increasingly volatile forex landscape.
What Are Carry Trades?
Carry trading is a classic forex strategy that involves borrowing money in a low-yielding currency and investing it in a higher-yielding one. The profit comes from the interest rate differential between the two currencies—known as the “carry.”
For example, if a trader borrows in Japanese yen (with a near-zero interest rate) and invests in the Brazilian real (which might yield over 10%), they earn the “carry” as long as the exchange rate remains stable or moves in their favor.
For years after the 2008 financial crisis, global interest rates hovered near zero, and central banks coordinated their monetary policies. This left little room for interest rate arbitrage, rendering carry trades less attractive. But in 2025, those conditions have changed.
Why Carry Trades Are Back
1. Interest Rate Divergence
Central banks across the globe are now moving in different directions. While the U.S. Federal Reserve has begun cutting rates to support a cooling economy, others—like the Bank of Japan—are finally exiting their ultra-loose policies, while emerging market banks continue to hold rates high to fight inflation.
This has created wide interest rate gaps, reigniting the appeal of carry trades. Traders are once again scanning the globe for high-yielding currencies like the Mexican peso, South African rand, and Brazilian real, while funding those trades with low-yielders like the Japanese yen or Swiss franc.
2. Higher Market Volatility
Currency volatility has returned with force, driven by global tensions, shifting monetary policies, commodity price swings, and fluctuating economic data. While volatility can increase the risk of carry trades—especially when exchange rates move against the trade—it also offers entry and exit opportunities for skilled traders who understand risk management.
3. Dollar Weakness
The dollar, which served as the world’s dominant safe haven for years, has shown signs of weakening in 2025. This has encouraged traders to rotate out of dollar-denominated assets and explore more dynamic, higher-yielding currency pairs. A weaker dollar also reduces the risk of dollar-funded carry trades being unwound too quickly.
4. Improved Risk Appetite
With global inflation cooling and many economies stabilizing after pandemic-related disruptions, investors have grown more tolerant of risk. This shift in sentiment is pushing more capital into emerging markets and higher-yielding currencies, even as political and economic risks remain elevated.
The Risks Traders Need to Watch
While the return of carry trades offers fresh profit potential, it also comes with renewed risk—particularly in a volatile environment.
Exchange Rate Risk
Even the best carry trade can be wiped out if the target currency suddenly depreciates. Traders must stay alert to shocks that can reverse capital flows, such as political instability, sanctions, or unexpected central bank moves.
Interest Rate Surprise
Central banks are increasingly data-dependent and unpredictable. A surprise rate cut in a high-yielding currency or an unexpected rate hike in a funding currency can quickly reverse the direction of the carry trade, turning gains into losses overnight.
Liquidity Risk
Some high-yielding currencies, particularly in emerging markets, can become illiquid during market stress. This increases slippage, widen spreads, and accelerates losses during large moves.
Geopolitical Events
War, sanctions, elections, or trade disputes can cause currency pairs to swing dramatically. In 2025, geopolitical developments in Eastern Europe, the Middle East, and Asia continue to be major sources of volatility.
Top Currency Pairs to Watch in 2025
JPY/BRL (Japanese Yen / Brazilian Real)
A classic carry trade pair, with Japan’s low rates and Brazil’s high yields offering wide spreads. However, it is sensitive to commodity cycles and emerging market flows.
CHF/ZAR (Swiss Franc / South African Rand)
A high-risk, high-reward trade for those comfortable with South Africa’s political risks and economic volatility.
USD/MXN (U.S. Dollar / Mexican Peso)
Attractive for both carry and liquidity, with Mexico maintaining relatively high interest rates and strong trade ties to North America.
EUR/TRY (Euro / Turkish Lira)
A speculative pair given Turkey’s historically high yields—but also high currency risk and policy unpredictability.
Strategic Tips for Carry Trade Traders
- Use tight risk management tools, including stop-loss orders and position sizing.
- Monitor macro data closely, especially interest rate forecasts, inflation trends, and central bank commentary.
- Consider hedging strategies to protect against sharp drawdowns during volatility spikes.
- Diversify currency exposure across multiple regions to reduce concentration risk.
- Stay informed on geopolitical developments, particularly in emerging markets.
What the Return of Carry Trades Signals for the Market
The resurgence of carry trades is more than just a trading opportunity—it reflects a changing global macro environment. Interest rate normalization, monetary policy fragmentation, and the re-pricing of risk are reshaping the forex landscape.
For traders, this means a more active and dynamic market—with greater opportunity, but also greater complexity. Passive strategies and one-size-fits-all models are being replaced by more nuanced approaches based on regional macro analysis, real-time data, and geopolitical awareness.
In short: the world of forex trading in 2025 is back to being exciting—and dangerous—for those who don’t adapt.
Carry trades and currency volatility are once again defining features of the forex landscape in 2025. As interest rate differentials widen and macro conditions diverge, traders have fresh opportunities to profit—but only if they respect the risks.
Understanding the mechanics of carry trades, recognizing the risks of currency volatility, and staying on top of global macro trends will be essential for anyone looking to navigate this revived chapter in global currency markets. The game is on—but it demands skill, timing, and discipline more than ever.
