What it is
A carry trade is a strategy where an investor borrows money in a currency with a low interest rate, then converts that borrowed money into another currency that offers a higher interest rate, and invests it. The profit comes from the difference between the interest earned on the higher-yielding currency and the interest paid on the lower-yielding borrowed currency. This strategy relies on stable exchange rates to avoid losses from adverse currency movements.
Carry trades are widely discussed in foreign exchange markets and financial news, particularly when central banks maintain significant interest rate differentials. For example, if the Bank of Japan keeps rates near zero while the Federal Reserve raises rates, traders might borrow yen and buy dollars. However, the strategy carries exchange rate risk; if the higher-yielding currency depreciates significantly against the borrowed currency, the gains from interest rate differentials can be wiped out or even lead to losses.
Why it matters
Carry trades influence currency valuations and global capital flows, indirectly affecting the strength of your local currency and international investment returns.
Reviewed under editorial standardsUpdated September 26, 2026Not investment advice