Deutsche Bank: Yield Is Primary Driver for Currency Markets in 2026

The search for yield is the primary force shaping foreign exchange markets in 2026, with carry trade strategies performing well amid a stable global economy, according to a Friday report from Deutsche Bank AG.

George Saravelos, the bank's head of currency strategy, wrote that yield has been the dominant theme for currencies this year, noting that risk-adjusted carry has been the most significant factor behind FX movements.

Yield Overrides Market Events

Deutsche Bank's analysis suggests that the focus on yield has overshadowed major developments, including the war in the Middle East, leadership changes at the Federal Reserve, and significant valuation shifts in technology stocks. This dynamic underscores the market's current emphasis on interest rate differentials when pricing currencies.

The hawkish repricing of Federal Reserve policy expectations has emerged as the most important positive driver for the U.S. dollar, according to Saravelos. However, the bank believes a much larger move would be needed to push the dollar significantly higher across the board.

Outlook for Major Currencies

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Deutsche Bank outlined its strategic view on several key currencies based on the prevailing yield-driven environment:

• U.S. Dollar (USD): For the dollar to regain its status as a clear high-yielder and experience a major rally, markets would need to price in aggressive rate hikes of 75 to 100 basis points or more.
• Euro (EUR): The bank does not see a strong reason for the euro to fall further, citing potential upside risks to European growth expectations that could limit broad dollar strength.
• Japanese Yen (JPY): The yen remains under pressure from its low front-end yields relative to other major currencies. However, Japan's efforts to promote domestic investment could provide a source of strength for the currency over the long term.
• Swiss Franc (CHF): For investors looking to execute carry trades, Deutsche Bank stated a preference for using the Swiss franc over the yen as a funding currency.

Domestic Flows as a Key Factor

Looking at Japan, Deutsche Bank highlighted that shifts in domestic investment flows can generate significant currency movements, even if policy implementation is slow. The bank pointed to Japan’s 2014 Government Pension Investment Fund (GPIF) reform as a historical precedent for how changing domestic flow expectations can have a major impact on the foreign exchange market.